Main features of perfect competition.

Behavior of a perfectly competitive firm. Determining the optimal volume under conditions of perfect competition.

Production choice: maximizing profits, minimizing losses, closing the company

Short run supply curve

The behavior of the company in the long run

1. Main features of perfect competition.

Free competition- this is a state of a market system when there are many buyers and sellers in the market offering the same goods, easily entering and exiting the industry.

Main features:

1) number of companies: this market has a large number of independently operating sellers offering their products in highly organized markets. For example, agricultural commodity markets, stock exchange, foreign exchange market;

2) type of product: Competing firms produce similar (homogeneous) products. At a given price, the buyer is indifferent from which seller to buy the product. All products in the industry are perfect substitutes for each other (the coefficient of cross elasticity tends to infinity). Therefore, there is no non-price competition;

3) price control: the share of each economic agent is extremely small, therefore There is no control over price. This is explained by the following: each firm produces only a small part of the industry's sales. And due to its small market share, it is not able to influence the market price by changing the quantity of goods produced by the industry;

4) a market of perfect competition is characterized by such a low degree of interaction between firms that each individual firm makes decisions without taking into account the reaction of its competitors (i.e., each firm is independent of the behavior of other firms, it makes any decision independently);

5) homogeneity of goods implies the absence of price discrimination;

6) absolute price information. No one participant knows more about the market than the others;

7) conditions for entry and exit from the industry: The industry is open to entry and exit by any number of firms. Not a single company in the industry is taking any counteraction, nor are there any legal restrictions on this process.

2. Behavior of a perfectly competitive firm.

Perfectly competitive firm is a company that does not pursue its own pricing policy, but only adapts to market prices.

1.Peculiarities of demand for the products of a perfectly competitive company .

The product of a perfectly competitive firm is standardized, i.e. it does not differ from the products of other firms operating in this market, therefore such products will be characterized by absolute substitution for each other. In this case, the demand for the product of an individual firm (d) will be completely elastic, and the demand curve will take the form of a horizontal line (Fig. 1, b).

Rice. 1. Market demand (a) and demand for the product of an individual company (b)

Firstly, A perfectly competitive firm can sell any quantity of output at or below the equilibrium price Pe. However, it cannot sell a single unit of output at a price higher than the equilibrium price.(this is evidenced by the vertical segment of the demand curve; usually it is not taken into account and it is believed that the demand curve of a perfectly competitive firm is absolutely elastic);

secondly, it indicates that The equilibrium price does not depend on the firm's output. Thus, the equilibrium price is a given value for a given firm.

However, it should be remembered that we are not talking about the fact that in a perfectly competitive market demand is perfectly elastic. Since market demand is formed in accordance with the law of demand and is expressed by a curveD, which has a negative slope (Fig. 1, a). Demand is elastic only in relation to the product of an individual firm operating in a perfectly competitive market (Fig. 1, b).

2. For a perfectly competitive firm, the market price is set externally, but when making current decisions, the price is taken as constant.

3. The quantity supplied by a firm depends on the market price.

A market economy is a complex and dynamic system, with many connections between sellers, buyers and other participants in business relationships. Therefore, markets by definition cannot be homogeneous. They differ in a number of parameters: the number and size of firms operating in the market, the degree of their influence on the price, the type of goods offered, and much more. These characteristics determine types of market structures or otherwise market models. Today it is customary to distinguish four main types of market structures: pure or perfect competition, monopolistic competition, oligopoly and pure (absolute) monopoly. Let's look at them in more detail.

Concept and types of market structures

Market structure– a combination of characteristic industry characteristics of market organization. Each type of market structure has a number of characteristic features that affect how the price level is formed, how sellers interact in the market, etc. In addition, types of market structures have varying degrees of competition.

Key characteristics of types of market structures:

• number of sellers in the industry;
• firm size;
• number of buyers in the industry;
• type of product;
• barriers to entry into the industry;
• availability of market information (price level, demand);
• the ability of an individual firm to influence the market price.

The most important characteristic of the type of market structure is level of competition, that is, the ability of an individual selling company to influence the overall market conditions. The more competitive the market, the lower this opportunity. Competition itself can be both price (price changes) and non-price (changes in the quality of goods, design, service, advertising).

You can select 4 Main Types of Market Structures or market models, which are presented below in descending order of level of competition:

• perfect (pure) competition;
• monopolistic competition;
• oligopoly;
• pure (absolute) monopoly.

A table with a comparative analysis of the main types of market structures is shown below.

Table of main types of market structures

Perfect (pure, free) competition

Perfectly competitive market (English "perfect competition") – characterized by the presence of many sellers offering a homogeneous product, with free pricing.

That is, there are many companies on the market offering homogeneous products, and each selling company, by itself, cannot influence the market price of these products.

In practice, and even on the scale of the entire national economy, perfect competition is extremely rare. In the 19th century it was typical for developed countries, but in our time only agricultural markets, stock exchanges or the international currency market (Forex) can be classified as perfectly competitive markets (and then with a reservation). In such markets, fairly homogeneous goods are sold and bought (currency, stocks, bonds, grain), and there are a lot of sellers.

Features or conditions of perfect competition:

• number of selling companies in the industry: large;
• size of selling companies: small;
• product: homogeneous, standard;
• price control: absent;
• barriers to entry into the industry: practically absent;
• methods of competition: only non-price competition.

Monopolistic competition

Market of monopolistic competition (English "monopolistic competition") – characterized by a large number of sellers offering a variety of (differentiated) products.

In conditions of monopolistic competition, entry into the market is fairly free; there are barriers, but they are relatively easy to overcome. For example, in order to enter the market, a company may need to obtain a special license, patent, etc. The control of selling firms over firms is limited. Demand for goods is highly elastic.

An example of monopolistic competition is the cosmetics market. For example, if consumers prefer Avon cosmetics, they are willing to pay more for them than for similar cosmetics from other companies. But if the price difference is too large, consumers will still switch to cheaper analogues, for example, Oriflame.

Monopolistic competition includes the food and light industry markets, the market of medicines, clothing, footwear, and perfumes. Products in such markets are differentiated - the same product (for example, a multicooker) from different sellers (manufacturers) can have many differences. Differences can manifest themselves not only in quality (reliability, design, number of functions, etc.), but also in service: availability of warranty repairs, free delivery, technical support, installment payment.

Features or features of monopolistic competition:

• number of sellers in the industry: large;
• firm size: small or medium;
• number of buyers: large;
• product: differentiated;
• price control: limited;
• access to market information: free;
• barriers to entry into the industry: low;
• methods of competition: mainly non-price competition, and limited price competition.

Oligopoly

Oligopoly market (English "oligopoly") - characterized by the presence on the market of a small number of large sellers, whose goods can be either homogeneous or differentiated.

Entry into an oligopolistic market is difficult and entry barriers are very high. Individual companies have limited control over prices. Examples of oligopoly include the automobile market, markets for cellular communications, household appliances, and metals.

The peculiarity of oligopoly is that the decisions of companies on prices for goods and the volume of its supply are interdependent. The market situation strongly depends on how companies react when one of the market participants changes the price of their products. Possible two types of reaction: 1) follow reaction– other oligopolists agree with the new price and set prices for their goods at the same level (follow the initiator of the price change); 2) reaction of ignoring– other oligopolists ignore price changes by the initiating firm and maintain the same price level for their products. Thus, an oligopoly market is characterized by a broken demand curve.

Features or oligopoly conditions:

• number of sellers in the industry: small;
• firm size: large;
• number of buyers: large;
• product: homogeneous or differentiated;
• price control: significant;
• access to market information: difficult;
• barriers to entry into the industry: high;
• methods of competition: non-price competition, very limited price competition.

Pure (absolute) monopoly

Pure monopoly market (English "monopoly") – characterized by the presence on the market of one single seller of a unique (without close substitutes) product.

Absolute or pure monopoly is the exact opposite of perfect competition. A monopoly is a market with one seller. There is no competition. The monopolist has full market power: it sets and controls prices, decides what volume of goods to offer to the market. In a monopoly, the industry is essentially represented by just one firm. Barriers to entry into the market (both artificial and natural) are almost insurmountable.

The legislation of many countries (including Russia) combats monopolistic activities and unfair competition (collusion between firms in setting prices).

A pure monopoly, especially on a national scale, is a very, very rare phenomenon. Examples include small settlements (villages, towns, small cities), where there is only one store, one owner of public transport, one railway, one airport. Or a natural monopoly.

Special varieties or types of monopoly:

• natural monopoly– a product in an industry can be produced by one firm at lower costs than if many firms were involved in its production (example: public utilities);
• monopsony– there is only one buyer in the market (monopoly on the demand side);
• bilateral monopoly– one seller, one buyer;
• duopoly– there are two independent sellers in the industry (this market model was first proposed by A.O. Cournot).

Features or conditions of monopoly:

• number of sellers in the industry: one (or two, if we are talking about a duopoly);
• firm size: variable (usually large);
• number of buyers: different (there can be either many or a single buyer in the case of a bilateral monopoly);
• product: unique (has no substitutes);
• price control: complete;
• access to market information: blocked;
• Barriers to entry into the industry: almost insurmountable;
• methods of competition: absent as unnecessary (the only thing is that the company can work on quality to maintain its image).

Galyautdinov R.R.

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TOPIC 7. PERFECT COMPETITION

7.2. Principal options for a company's behavior in the short term

7.2.1. Profit maximization as the main motive of the company’s behavior

7.2.2. Three options for a company's behavior

7.3. Rule of equality of marginal cost and marginal revenue (MC = MR)

7.4. Supply curve and market equilibrium in a competitive industry

7.5. Dynamics of profit and supply volume in the long term. Perfect competition and economic efficiency

7.5.1. Profit level as a regulator of resource attraction

7.5.2. Perfect competition and economic efficiency

7.1. Features of a perfectly competitive market

7.1.1. Competition conditions and market type

The behavior of a company and its choice of production volumes depend on the type of market in which it operates.

The most powerful factor dictating the general conditions for the functioning of a particular market is the degree of development of competitive relations in it.

Etymologically the word competition goes back to Latin concurrentia, meaning clash, competition. Market competition is the struggle for limited consumer demand, waged between firms in the parts (segments) of the market available to them. In a market economy, competition performs the most important function of counterbalancing and at the same time complementing the individualism of market subjects. It forces them to take into account the interests of the consumer, and therefore the interests of society as a whole.

Indeed, during competition, the market selects from a variety of goods only those that consumers need. They are the ones who manage to sell. Others remain unclaimed and their production ceases. In other words, outside a competitive environment, an individual satisfies his own interests, regardless of others. In a competitive environment, the only way to realize one’s own interests is to take into account the interests of other persons. Competition is a specific mechanism by which a market economy resolves fundamental issues What? How? For whom to produce?

The development of competitive relations is closely related to splitting economic power. When it is absent, the consumer is deprived of choice and is forced to either completely agree to the conditions dictated by the manufacturer, or be completely left without the benefit he needs. On the contrary, when economic power is split and the consumer is faced with many suppliers of similar goods, he gains the opportunity to choose the one that best suits his needs and financial capabilities.

According to the degree of development of competition, economic theory distinguishes four main types of markets:

Þ Perfectly competitive market

monopolistic competition

· oligopoly,

· monopoly.

In a perfectly competitive market, the division of economic power is maximized and the mechanisms of competition operate at full strength. There are many manufacturers operating here, deprived of any leverage to impose their will on consumers.

With imperfect competition, the division of economic power is weakened or absent altogether. Therefore, the manufacturer acquires a certain degree of influence on the market.

The degree of market imperfection depends on the type of imperfect competition. In conditions of monopolistic competition, it is small and is associated only with the ability of the manufacturer to produce special varieties of goods that differ from competitors. In an oligopoly, market imperfection is significant and is dictated by the small number of firms operating on it. Finally, monopoly means the dominance of only one producer in the market.

Conditions of perfect competition

The market model of perfect competition (SC) is based on four main conditions (see diagram 7.1.).

Let's consider them sequentially.

Þ In order for competition to be perfect, the goods offered by firms must meet the condition uniformity products. This means that the products of firms in the minds of buyers are homogeneous and indistinguishable, that is, the products of different enterprises are completely interchangeable1 (they are complete substitute goods).

Under these conditions, no buyer would be willing to pay a higher price to a hypothetical firm than he would pay to its competitors. After all, the goods are the same, buyers do not care which company they buy them from, and they, of course, choose the cheapest ones. That is, the condition of product homogeneity actually means that the difference in prices is the only reason why a buyer can choose one seller over another.

Þ Further, with perfect competition, neither sellers nor buyers influence the market situation, due to a little And multiplicity all market entities. Sometimes both these sides of perfect competition are combined, speaking of atomic structure market. This means that there are a large number of small sellers and buyers in the market, just as any drop of water is made up of a gigantic number of tiny atoms.

At the same time, the purchases made by the consumer (or sales by the seller) are so small compared to the total volume of the market that the decision to reduce or increase their volumes does not create either surpluses or shortages. The total size of supply and demand simply “does not notice” such small changes.

Þ All of the above restrictions (homogeneity of products, large number and small size of enterprises) actually predetermine that With perfect competition, market participants are unable to influence prices. Therefore, it is often said that in perfect competition, each individual seller "takes the price," or is price taker(price-taker).

Þ The next condition for perfect competition is absence of barriers to entry and exit from the market. The fact is that when such barriers exist, sellers (or buyers) begin to behave as a single corporation, even if there are many of them and they are all small firms.

On the contrary, typical for perfect competition no barriers or freedom to enter to the market (industry) and leave it means that resources are completely mobile and move without problems from one activity to another. On the other hand, there are no difficulties with stopping operations on the market. Conditions do not force anyone to remain in the industry if it is not in their best interests. In other words, the absence of barriers means absolute flexibility and adaptability of a perfectly competitive market.

Þ The final condition for a perfectly competitive market to exist is that information about prices, technology, and likely profits is freely available to everyone. Firms have the ability to quickly and efficiently respond to changing market conditions by moving the resources they use. There are no trade secrets, unpredictable developments of events, or unexpected actions of competitors. That is, decisions are made by the company in conditions of complete certainty regarding the market situation or, what is the same, in the presence perfect information about the market.

7.1.2. The meaning of the concept of perfect competition

Abstractness of the concept of perfect competition

All four of the above conditions are so stringent that they can hardly be met by any really functioning market. Even markets that most resemble perfect competition only partially satisfy them.

For example, the world's stock (securities market) and commodity (commodity) exchanges very fully satisfy the first assumption, but only barely correspond to the second and third conditions. And none of them satisfies the condition of perfect awareness (knowledge).

For all its abstractness, the concept of perfect competition plays an extremely important role in economic science.

Firstly, The model of a perfectly competitive market makes it possible to judge the principles of operation of many small firms selling standardized homogeneous products, and, therefore, operating in conditions close to perfect competition.

Secondly, it has enormous methodological significance, since it allows - albeit at the cost of large simplifications of the actual market picture - to understand the logic of the company's actions. This technique, by the way, is typical for many sciences. Thus, in physics a number of concepts are used ( ideal gas, black body, ideal engine), based on assumptions (no friction, heat loss, etc.), which are never fully implemented in the real world, but serve as convenient models for describing it.

What conditions can be considered close to a perfectly competitive market? Generally speaking, there are different answers to this question. We will approach it from the position of the firm, that is, we will find out in what cases the firm in practice acts as (or almost as) as if it were surrounded by a perfectly competitive market.

7.1.3. Perfect competition criterion

Let us first understand what the demand curve for the products of a firm operating in conditions of perfect competition should look like. Let us remember, firstly, that the company accepts the market price, that is, the latter is a given value for it. Secondly, the company enters the market with a very small part of the total quantity of goods produced and sold by the industry. Consequently, the volume of its production will not affect the market situation in any way and this given price level will not change with an increase or decrease in output.

6.2. Perfect competition. Equilibrium in the short and long run

A market under conditions of perfect competition has the following features:

1. A large number of firms operate in this market, each of which is independent of the behavior of other firms and makes decisions independently. Any firm in the industry is unable to influence the market price of the goods produced by the industry.

2. Firms in the industry produce the same (homogeneous) product, so it makes absolutely no difference to buyers which company’s product they buy.

3. The industry is open to entry and exit by any number of firms. Not a single company in the industry is taking any counteraction, nor are there any legal restrictions on this process.

Individual firm demand. Since, in conditions of perfect competition, a firm in an industry, within the limits of changes in its output volumes, does not have a significant impact on the price of the product and sells any quantity of goods at a constant price, the demand for the products of an individual firm is absolutely elastic, and the demand curve of each firm is horizontal. In addition, each additional unit of goods sold will add to the firm's total revenue the same amount of marginal revenue equal to the price of the goods.

Consequently, for an individual firm operating in a perfectly competitive market, the average and marginal revenues are equal to the price of the product P, i.e. МR = AR = P, therefore the demand, average and marginal revenue curves coincide and represent the same horizontal line drawn at the price level of the product.

Equilibrium in the short and long run

According to rules 1 and 2 (see Topic 6.1), operating in each market structure, a firm, in order to maximize profits, must produce such a volume of goods and services q E, at which MR = MC(rule 2) and P > AVC(rule 1). But under perfect competition, marginal revenue MR equals average revenue AR and the price of the product, i.e. MR = AR = P.

This means that, operating in a perfectly competitive market, a firm will maximize profit if it produces a volume of q goods such that marginal costs equal the price of the goods set by the market regardless of the firm’s actions.

This situation is shown in Fig. 13.

Rice. 13. Equilibrium in the short run

By producing Qe units of goods when MC = P, the firm maximizes profit, and any deviations from this volume reduce its profit. If the company produces Q1< Qe единиц товара, то цена товара (которая не меняется) станет превосходить предельные издержки, и фирма обязана в этих условиях увеличить производство, иначе она не максимизирует прибыль. Когда же Q2 >Qe, marginal costs begin to exceed price and the firm needs to reduce output.

Please note that at point E1 the marginal cost MR is also equal to the price of product P, but at point E (not E1) the price P exceeds the average variable cost AVC, i.e. rule 1 is satisfied. This means that it is at point E, and not E1, that the firm has equilibrium in the short run.

Supply curve in the short run. Market price of the product. Let us assume that the initial price P, under the influence of the market, increased to P e1. As just shown, under these conditions the firm will increase output to a level Q e1 when marginal costs again equal P e1. Therefore, for any price Pi greater than AVC, the firm will produce so many units that the marginal cost MCi corresponding to that output equals Pi. But since the MC curve shows the value of marginal costs for any values ​​of Q, then the points of the MC curve will determine production volumes at all price values ​​when MC = P. In addition, according to rule 1, if the price of a product falls below the AVC value, then the firm will stop existence and Q = 0. But, as is known, the curve showing the relationship between the price of a product and the number of units of a product offered by a company for sale is a supply curve.

This leads to an important conclusion: The supply curve of a firm operating in the short run under conditions of perfect competition is the segment of the marginal cost curve located above the AVC curve(segment VK in Fig. 13).

If there are N firms in an industry, then supply curves can be constructed in a similar way for each of them. Then The industry supply curve can be obtained by horizontally summing the supply curves of individual firms.

The market price of a product under conditions of perfect competition is determined by the point of intersection of the industry supply curve and the market demand curve. Although each firm in an industry does not significantly influence the market for a product, the joint actions of all firms in the industry (as reflected in the industry supply curve), as well as the collective actions of households (as reflected in the market demand curve) can lead to shifts in the demand and supply curves and changes in the equilibrium price . But at the new equilibrium price, each firm will strive to produce so many units of a homogeneous good so that MC = P. With such output volumes, QS of the industry equals market QD, and equilibrium occurs in the industry.

However, the amount of profit received is of great importance for the company. The company makes a profit if the revenue per unit of production, i.e. AR, exceeds unit costs, i.e. ATS. But since AR = P, then this is equivalent to the statement that the firm receives economic profit whenever the market price of the product exceeds the average total costs, i.e. When P > ATS. This means that, depending on the value of the market price of the product, three options are possible.

1. The price of the product is lower than the average total costs for that volume of production q, when MC = P; in this case, the company will have losses (Fig. 14a).

2. With production volume q, the price of the product coincides with the value of average total costs and economic profit is zero. The value of production volume in this case reflects the so-called break-even point (Fig. 14b). The level of instability is observed when total costs are equal to total revenue TC = TR or when marginal and average costs are equal (MC = ATC).

3. The price of the product is higher than the average total costs for the production of q units of the product; in this case, the company will make a profit (Fig. 14 c).

Rice. 14. Possible equilibrium options in the short term

Consequently, a company, predicting its activities, must determine production volumes at which the minimum values ​​of ATC and AVC are achieved. They will serve as a guide for the company’s behavior in a given market structure, allowing one to find the break-even level and the moment of production cessation.

Equilibrium in the long run

Over the long term, firms can adapt to various changes in the market. The long-term period in a perfectly competitive market is characterized by the following conditions:

1. Operating firms make the most efficient use of available capital equipment. This means that each firm in the industry in all short-term periods, which together form the long-term period, maximizes profit by producing such a volume of output when MS = P.

2. There are no incentives for firms from other industries to enter this industry. In other words, all firms in the industry have a production volume corresponding to the minimum average total costs in each short-term period, and receive zero profit, i.e. SATC = P.

3. Firms in the industry do not have the opportunity to reduce total costs per unit of production and make a profit by expanding the scale of production. This is equivalent to the condition that each firm in the industry produces a volume of output q* corresponding to the minimum of long-run average total costs, where the LATC curve has a minimum.

It is important to note that since in perfect competition firms are free to enter and exit an industry, in long-run equilibrium each firm will have zero economic profit.

(Materials are based on: V.F. Maksimova, L.V. Goryainova. Microeconomics. Educational and methodological complex. - M.: Publishing center of the EAOI, 2008. ISBN 978-5-374-00064-1)

The manual is presented on the website in an abbreviated version. This version does not include testing, only selected tasks and high-quality assignments are given, and theoretical materials are cut by 30%-50%. I use the full version of the manual in classes with my students. The content contained in this manual is copyrighted. Attempts to copy and use it without indicating links to the author will be prosecuted in accordance with the legislation of the Russian Federation and the policies of search engines (see provisions on the copyright policies of Yandex and Google).

11.1 Perfect competition

We have already defined that a market is a set of rules using which buyers and sellers can interact with each other and carry out transactions. Over the history of the development of economic relations between people, markets have constantly undergone transformations. For example, 20 years ago there was not the abundance of electronic markets that are available to consumers now. Consumers couldn't buy a book, an appliance, or a pair of shoes by simply opening an online retailer's website and making a few clicks.

At the time when Adam Smith began to talk about the nature of markets, they were structured something like this: most of the goods consumed in European economies were produced by many manufactories and artisans who used predominantly manual labor. The company was very limited in size, and used labor of a maximum of several dozen workers, and most often 3-4 workers. At the same time, there were quite a lot of similar manufactories and artisans, and the producers produced fairly homogeneous goods. The variety of brands and types of goods that we are accustomed to in modern consumer society did not exist then.

These features led Smith to conclude that neither consumers nor producers have market power, and the price is set freely through the interaction of thousands of buyers and sellers. Observing the features of markets in the late 18th century, Smith concluded that buyers and sellers were guided toward equilibrium by an "invisible hand." Smith summarized the characteristics that were inherent in markets at that time in the term "perfect competition" .

A perfectly competitive market is a market with many small buyers and sellers selling a homogeneous product in conditions where buyers and sellers have the same information about the product and each other. We have already discussed the main conclusion of Smith’s “invisible hand” hypothesis - a perfectly competitive market is capable of ensuring efficient allocation of resources (when a product is sold at prices that exactly reflect the firm’s marginal cost of producing it).

Once upon a time, most markets really looked like perfect competition, but at the end of the 19th and beginning of the 20th century, when the world became industrialized and monopolies formed in a number of industrial sectors (coal mining, steel production, railroad construction, banking), it became clear that the model of perfect competition is no longer suitable for describing the real state of affairs.

Modern market structures are far from the characteristics of perfect competition, therefore perfect competition is currently an ideal economic model (like an ideal gas in physics), which is unattainable in reality due to numerous friction forces.

The ideal model of perfect competition has the following characteristics:

1. Many small and independent buyers and sellers, unable to influence the market price
2. Free entry and exit of firms, that is, no barriers
3. A homogeneous product with no qualitative differences is sold on the market.
4. Product information is open and equally accessible to all market participants

Subject to these conditions, the market is able to allocate resources and benefits efficiently. The criterion for the efficiency of a competitive market is the equality of prices and marginal costs.

Why does allocative efficiency arise when prices equal marginal cost and are lost when prices do not equal marginal cost? What is market efficiency and how is it achieved?

To answer this question, it is enough to consider a simple model. Consider potato production in an economy of 100 farmers for whom the marginal cost of potato production is an increasing function. The 1st kilogram of potatoes costs 1 dollar, the 2nd kilogram of potatoes costs 2 dollars and so on. None of the farmers has such differences in the production function that would allow him to gain a competitive advantage over others. In other words, none of the farmers have market power. Farmers can sell all the potatoes they sell at the same price, determined on the market balance of total demand and total supply. Consider two farmers: farmer Ivan produces 10 kilograms of potatoes per day at a marginal cost of $10, and farmer Mikhail produces 20 kilograms per day at a marginal cost of $20.

If the market price is $15 per kilogram, then Ivan has an incentive to increase potato production because each additional product and kilogram sold brings him an increase in profit until his marginal cost exceeds 15. For similar reasons, Mikhail has an incentive to reduction in production volumes.

Now let’s imagine the following situation: Ivan, Mikhail, and other farmers initially produce 10 kilograms of potatoes, which they can sell for 15 rubles per kilogram. In this case, each of them has incentives to produce more potatoes, and the current situation will be attractive for the arrival of new farmers. Although each farmer has no influence over the market price, their combined efforts will cause the market price to fall until the opportunity for additional profit for everyone is exhausted.

Thus, thanks to the competition of many players in conditions of complete information and a homogeneous product, the consumer receives the product at the lowest possible price - at a price that only breaks the producer’s marginal costs, but does not exceed them.

Now let's see how equilibrium is established in a perfectly competitive market in graphical models.

The equilibrium market price is established in the market as a result of the interaction of supply and demand. The firm accepts this market price as given. The company knows that at this price it can sell as many goods as it wants, so there is no point in reducing the price. If a company increases the price of a product, it will not be able to sell anything at all. Under these conditions, the demand for the products of one company becomes absolutely elastic:

The firm takes the market price as given, that is P = const.

Under these conditions, the company’s revenue graph looks like a ray emerging from the origin:

It's easy to prove:

MR = TR Q ′ = (P * Q) Q ′

Because the P = const, P can be taken out by the sign of the derivative. In the end it turns out

MR = (P * Q) Q ′ = P * Q Q ′ = P * 1 = P

M.R. is the tangent of the angle of inclination of the straight line TR.

A perfectly competitive firm, like any firm in any market structure, maximizes total profit.

A necessary (but not sufficient condition) for maximizing the firm's profit is that the derivative profit is equal to zero.

r Q ′ = (TR-TC) Q ′ = TR Q ′ - TC Q ′ = MR - MC = 0

Or MR = MC

That is MR = MC is another entry for the condition profit Q ′ = 0.

This condition is necessary, but not sufficient to find the point of maximum profit.

At the point where the derivative is zero, there can be a minimum profit along with a maximum.

A sufficient condition for maximizing the firm's profit is to observe the vicinity of the point where the derivative is equal to zero: to the left of this point the derivative must be greater than zero, to the right of this point the derivative must be less than zero. In this case, the derivative changes sign from plus to minus, and we get the maximum rather than the minimum profit. If in this way we have found several local maxima, then to find the global maximum profit we should simply compare them with each other and select the maximum profit value.

For perfect competition, the simplest case of profit maximization looks like this:

We will consider more complex cases of profit maximization graphically in the appendix in the chapter.

11.1.2 Supply curve of a perfectly competitive firm

We realized that a necessary (but not sufficient) condition for maximizing a firm's profit is equality P=MC.

This means that when MC is an increasing function, then to maximize profits the firm will choose points lying on the MC curve.

But there are situations when it is profitable for a firm to leave an industry rather than produce at the point of maximum profit. This occurs when the firm, being at the point of maximum profit, cannot cover its variable costs. In this case, the company receives losses that exceed its fixed costs.
The optimal strategy for the company is to exit the market, because in this case it receives losses exactly equal to its fixed costs.

Thus, the firm will remain at the point of maximum profit, and not leave the market when its revenue exceeds variable costs, or, which is the same thing, when its price exceeds average variable costs. P>AVC

Let's look at the graph below:

Of the five designated points at which P=MC, the firm will remain on the market only at points 2,3,4. At points 0 and 1, the firm will choose to exit the industry.

If we consider all possible options for the location of straight line P, we will see that the firm will choose points lying on the marginal cost curve that will be higher than AVC min.

Thus, the supply curve of a competitive firm can be constructed as the part of MC lying above AVC min.

This rule is only applicable when the MC and AVC curves are parabolas. Consider the case where MC and AVC are straight lines. In this case, the total cost function is a quadratic function: TC = aQ 2 + bQ + FC

Then

MC = TC Q ′ = (aQ 2 + bQ + FC) Q ′ = 2aQ + b

We get the following graph for MC and AVC:

As can be seen from the graph, when Q > 0, the MC graph always lies above the AVC graph (since the MC straight line has a slope 2a, and the straight line AVC is the inclination angle a.

11.1.3 Equilibrium of a perfectly competitive firm in the short run

Let us recall that in the short term the company necessarily has both variable and fixed factors. This means that the company’s costs consist of a variable and a fixed part:

TC = VC(Q) + FC

The firm's profit is p = TR - TC = P*Q - AC*Q = Q(P - AC)

At the point Q* The firm achieves maximum profit because it P=MC(a necessary condition), and profit changes from increasing to decreasing (sufficient condition). On the graph, the firm's profit is depicted as a shaded rectangle. The base of the rectangle is Q*, the height of the rectangle is (P - AC). The area of ​​the rectangle is Q * (P - AC) = p

That is, in this version of equilibrium, the firm receives economic profit and continues to operate in the market. In this case P>AC at the optimal release point Q*.

Let's consider the equilibrium option when the firm receives zero economic profit

In this case, the price at the optimum point is equal to average costs.

A firm can even earn negative economic profits and still continue to operate in the industry. This occurs when the optimum price is lower than average but higher than average variable cost. The company, even receiving economic profit, covers variable and part of the fixed costs. If the company leaves, it will bear all fixed costs, so it continues to operate in the market.

Finally, the firm leaves the industry when, at the optimal volume of output, its revenue does not even cover variable costs, that is, when P< AVC

Thus, we have seen that a competitive firm can earn positive, zero, or negative profits in the short run. A firm exits the industry only when, at the point of optimal output, its revenue does not even cover its variable costs.

11.1.4 Equilibrium of a competitive firm in the long run

The difference between the long-term period and the short-term period is that all factors of production for the company are variable, that is, there are no fixed costs. Also, as in the short term, firms can easily enter and exit the market.

Let us prove that in the long run the only stable market condition is one in which the economic profit of each firm tends to zero.

Let's consider 2 cases.

Case 1 . The market price is such that firms earn positive economic profits.

What will happen to the industry in the long term?

Since information is open and publicly available, and there are no market barriers, the presence of positive economic profits for firms will attract new firms to the industry. When new firms enter the market, they shift market supply to the right, and the equilibrium market price drops to a level at which the opportunity to make a positive profit will not be completely exhausted.

Case 2 . The market price is such that firms receive negative economic profits.

In this case, everything will happen in the opposite direction: since firms receive negative economic profit, some firms will leave the industry, supply will decrease, and the price will rise to a level at which the economic profit of firms will not be equal to zero.