Perfectly competitive firm is a firm operating in a perfectly competitive market. A perfectly competitive market is a market structure characterized by price competition between firms that are unable to exert any influence on the market price. Among its inherent specific features, it should be highlighted that a perfectly competitive firm:

cannot influence the market price;

takes the market price as given.

Therefore, with perfect competition, interaction between firms is devoid of strategic behavior, i.e. the company does not take into account the reactions of its competitors to the decisions it makes, and the essence of its behavior comes down to adapting the emerging market situation.

The offer is perfect competitive firm in the short term. Since a perfectly competitive firm is not able to influence the market price, then for it the implementation of the principle of profit maximization is associated with the choice of supply volume. It must be such that the marginal cost of production equals the market price per unit of output. Considering that, within the framework of the technology used by the company, the level of marginal costs is determined by the characteristics of the production function, it becomes obvious that the volume of supply of the company will depend on the level of the market price.

A) the case of profit maximization

A firm always maximizes total profit at an output for which marginal revenue equals marginal cost. As long as marginal revenue exceeds marginal cost, the total profit function will rise and the firm will increase supply.

B) case of self-sufficiency

If the market price decreases to the level of minimum average costs, the company will continue production, operating on the basis of self-sufficiency. At the same time, without receiving economic profit, the company will actually have some accounting profit. Consequently, the firm always carries out production for which total costs minimally exceed total revenues.

C) case of minimizing losses

The firm always minimizes short-run losses by stopping production if price falls below average variable cost. If production ceases, the firm's losses will be equal to its total fixed costs.

The supply curve of a perfectly competitive firm in the short run is the part of its marginal cost curve located above the minimum average variable costs.

Supply of a perfectly competitive firm in the long run. In the long run, a firm can change all factors and even leave the industry, while other firms can enter it, which determines the nature of establishing long-term market equilibrium.

In the long run, perfectly competitive firms produce at minimum long-run average cost and earn no economic profit.

The long-run supply curve of a perfectly competitive firm is the portion of the upward-sloping portion of its long-run marginal cost curve that lies above the intersection with its long-run average cost curve..

When analyzing the mechanism that regulates the number of firms in an industry, one should take into account the realities of business practice. Thus, given the difficulties of capital transfer, this mechanism works better for expansion rather than contraction. Moreover, even knowing that there will be zero economic profit in the long run, firms may enter an industry for a variety of reasons:

desire to obtain high profits in the short term;

differences in actual costs;

difficulties in establishing long-term equilibrium;

presence of accounting profit.

Offering a perfectly competitive industry.Industry supply in the short term. Industry (market) offer represents the volume of output carried out by all firms in the industry. If the industry has reached equilibrium, then the quantity supplied by each firm in the industry in the short run will be represented by its marginal cost curve.

The short-run market supply curve of a perfectly competitive industry is the sum of the short-run supply curves of individual firms.

The principle of summing the supply curves of firms to determine the industry supply curve is applicable only to the extent that the prices of the variable factors used in the industry remain constant. Since an increase in industry supply will lead to an increase in demand for variable factors and may cause an increase in prices for them, in reality, constructing an industry supply curve does not come down to adding up the supply curves of individual firms. The short-term industry supply curve itself will be determined by such factors as:

number of firms in the industry;

average size of firms in the industry;

prices used by the industry of variable resources;

technologies used in the industry.

Industry supply in the long run. Expansion or contraction of an industry does not affect market equilibrium prices, since it inevitably returns to the level of minimum long-term average costs. This means that the long-run industry supply curve is perfectly elastic and should be represented by a horizontal line. However, this assumption is valid only in the case of constant prices for production factors. But since the prices of factors can change under the influence of demand for them, the position of the long-term supply curve of the industry will depend on the extent to which changes in the volume of production in the industry affected the prices of the factors of production used by the industry. Depending on the nature of this influence, industries are distinguished:

with fixed costs;

with rising costs;

with decreasing costs

Efficiency of competitive markets.

The problem of ensuring market efficiency is, firstly, to rationally distribute resources and, secondly, to ensure their efficient use.

Rational allocation of resources is achieved when their distribution between industries ensures the production of an optimal set of goods from the point of view of society, that is, corresponding to the structure of its needs. The most efficient allocation of resources will be achieved when the marginal cost of producing a product is equal to its market price MC=P, since in this case the value of the last unit of production for the buyer is equal to the value of the resources necessary for its production.

Efficient use of resources is achieved when the production of goods included in the optimal set is carried out at the lowest costs for existing technologies. This means that the level of long-term average costs should be taken as an indicator of the efficiency of resource use.

A perfectly competitive market is economically efficient because the market forces operating in it force firms to produce at minimum long-term average costs, thereby ensuring the best use of resources, and to sell products at prices equal to the marginal costs of production, thereby ensuring a rational allocation of resources.

The economic efficiency of perfectly competitive markets should not be viewed as some absolute to be strived for. Here we have our own restrictions:

firstly, this efficiency is achievable only under the condition of complete standardization of products, and this not only leads to a narrowing of the product range, and therefore a decrease in consumer welfare, but also contradicts the condition of rational distribution of resources;

secondly, operating with zero economic profit, firms find themselves deprived of a source of development, which becomes an obstacle to scientific and technological progress.

Seminar

Basic provisions of the theory of production. Effect of scale.

The essence and structure of costs.

Law of Diminishing Marginal Productivity.

Offers from a perfectly competitive firm and industry.

Efficiency of competitive markets.

Pure (perfect) competition. There are several basic market models, including the model of pure competition. Examples of markets corresponding to this model are markets for agricultural products and currency exchanges. The main features of pure competition or a competitive market are as follows:

1 A very large number of independent firms offering their products on the market.

2 Standardized products offered by firms on the market. Products in the eyes of the buyer different companies are no different from each other.

3 "Agreement with price." In this market, firms are relatively small and cannot influence the price established on it, so they “agree” with it and sell their goods at this price.

4 Free entry and exit into the market (from the industry) - there are no obstacles to entering the market or curtailing activities on it.

Offer from a competitive firm. In an effort to maximize profits or minimize losses in a competitive market, a firm in a specific period of time offers such a quantity of goods that ensures the achievement of this goal.

Supply in the short term. A short-term period is a period that is not sufficient for new producers to enter the market (industry) or exit it. Let's consider the application of the method of comparing limit indicators. The firm will compare marginal revenue with marginal cost and expand production until marginal revenue equals marginal cost. The quantity of products at which this equality is ensured is what the company will offer on the market.

The company may also encounter losses, for example, when the market price decreases. If for some reason the market price of the product has decreased and become below the minimum average gross costs, then the company will continue production in a volume that allows it to fully compensate for average variable costs and partially compensate for fixed costs, waiting for more favorable conditions. If the market price is below the level of variable costs, then the company will not be able to compensate for its costs and will be forced to stop production.

For a firm operating in a perfectly competitive market, marginal revenue is always equal to price sales of products.

Supply in a competitive market will be equal to the sum of supply from all firms. In this case, the marginal costs will be the same for all producers in the industry. But since they are the same for all firms, we can say that they determine not only the price of the products of an individual firm, but also the price on the market as a whole.

As a result of a change in demand, the price will also change, therefore, marginal costs will change so that their new level will correspond to the new price level. However, this condition does not mean that firms make a profit in any case. It all depends on the relationship between supply and demand. If demand is high, then equilibrium prices are high. Consequently, firms earn relatively higher profits. If demand decreases, then prices fall, and firms have to either adapt to low prices, including incurring losses, or leave the market.

Long-term supply. If, at the existing market price, some firms operate inefficiently, i.e. With high level costs, and suffers losses, then these firms stop production, and supply on the market is reduced. The result of a reduction in supply is an increase in price. The increased price will allow firms remaining in the industry to make economic profits.

In conditions of perfect competition, when there are no restrictions on access to the market, new firms appear, attracted by the increased profitability of the business. As a result, supply will increase and the price will decrease again.

The long-term period assumes that a firm can respond to changing situations in different ways: by increasing or decreasing the production capacity used; The sheer number of firms operating in the market may change. Our task is to determine how the situation in the industry will change in the event of one or another change in market demand. The purpose of the analysis is to determine the level of long-term market equilibrium. To simplify the analysis, let's make some assumptions:

Let us limit possible changes in the market to only one factor - a change in the number of firms;

All firms have the same size and cost structure, that is, the firms themselves are absolutely identical in size;

The value of production costs does not change, i.e. the price at which the company attracts economic resources remains unchanged in the long run.

Temporary gains and losses and the re-equilibrium of a typical firm and industry in the long run. Let us assume that the market situation looks as shown in Figure a, that is, it is characterized by supply and demand schedules D 1 and S 1. Point E 1 reflects the equilibrium parameters of the industry market - the equilibrium price (P 1) and the equilibrium production volume (Q 1). For simplicity of analysis, we will assume that with this market situation, the situation for each individual firm in the industry will be characterized by point A 1, at which, at price P 1, three graphs intersect - marginal revenue (MR), marginal cost (MC) and average gross costs (PBX). The optimal production volume of an individual firm will be Q 2 units of production (Figure b).

If, under the influence of non-price determinants of demand, the curve D 1 has shifted to position D 2, then the equilibrium moves from point E 1 to point E 2, and a new equilibrium price P 2 is established. For the firm, this will mean a shift in the marginal revenue schedule upward to the position MR 2. The equilibrium situation for the company will now be characterized, based on the rule MR = MC, by point A 2, which corresponds to the volume of production Q 4. For the firm, this will mean that the new price P 2 exceeds the average gross costs corresponding to the output volume Q 4 . In other words, every firm in the industry will earn an economic profit. This will attract new firms to the industry, the influx of which will increase market supply from level S 1 to S 2. Moreover, supply will increase until the market price reaches the initial level - P 1. It is then that the influx of new firms into this market will stop. Further expansion of the industry will no longer make sense, since the growing supply will reduce the market price below the level P 1. And this means losses for each individual manufacturer. Thus, economic profits arising in the short-term period will be reduced to zero, and long-term equilibrium will be restored at the same price level, but a larger industry supply. An increase in the number of firms operating in the industry will lead to an increase in the volume of industry supply from Q 1 to Q 5. The opposite situation is also possible (see figure).

In the event of an unfavorable price decline in the industry, losses arise, which, like the profit in the previous case, will also be temporary. Consequently, if in the short term every producer in the industry faces economic losses, then a massive outflow of firms will begin, and equilibrium is restored by reducing the volume of industry supply from Q l to Q 8 and reducing the number of firms on the market.

Thus, market competition, manifested in the free entry and outflow of firms from the industry, ultimately equalizes the price with the minimum average gross costs, and each firm will operate at point A 1, where MR = = MC = min ATS (exactly at the point minimum ATS, the MC and ATS graphs intersect). To produce above the min ATC point means to receive economic profit, which will be reduced to zero in the long run due to the influx of new firms. To produce below point min A TS means to incur economic losses, the presence of which will lead to a narrowing of the industry due to the outflow of firms in the long term. A reduction in supply will push the market price up, and the new equilibrium situation will be characterized by the initial value of the industry price. For each firm in the industry, this would mean producing at the break-even point and making only normal profits.

Types of costs; the company - its revenue and profit; profit maximization principle

Before we begin to analyze production costs, we need to clarify what we mean by costs and how we will measure them. What items should be included in the firm's costs? Obviously, costs include wages of employees and employees of the company and rent for office premises. What if the company already owns office space and does not need to pay rent? And how should we view the money that a firm spent two or three years ago (and cannot yet recoup) on equipment and on research and development?

There are two approaches to cost analysis: accounting and economic. An economist looks at production costs differently from an accountant who is interested in a firm's financial balance sheet. Accountants tend to analyze actual costs already incurred because they have to keep track of assets and liabilities and evaluate the firm's past performance. Actual costs include actual costs and depreciation deductions for capital equipment, the amount of which is determined in accordance with tax legislation.

Economists and managers, on the contrary, are interested in the prospects of the company. They are concerned about upcoming costs and how to reduce them and increase profitability. Οʜᴎ, therefore, should be interested opportunity costs (see introductory topic) - costs associated with lost opportunities to make the best use of a firm's resources. Opportunity costs include, but are not limited to, the explicit costs incurred by the firm.

Thus, when analyzing costs, an economist always proceeds from the fact that:

1) the reserves of resources available for involvement in production are limited;

2) there are several possibilities for using all resources and economic decisions always carry uncertainty;

3) all costs affecting supply have three characteristics: a) costs are associated with actions, not with things; b) they represent lost opportunities for specific decision makers; c) they are expected based on limiting values ​​since opportunity costs involve additional costs.

Although opportunity costs are often hidden, they should always be taken into account when making economic decisions. The opposite is true with sunk costs - they are usually visible, but they are always ignored when making economic decisions.

Sunk costs represent previously incurred and unreimbursable expenses. Because they are non-refundable, they do not influence the firm's decisions. For example, consider the purchase of special equipment designed to individual orders of a plant. We assume that the equipment can only be used for the purpose for which it was originally intended and cannot be remanufactured for an alternative use or sold to another company. The costs of such equipment are irreversible; the opportunity costs of use are zero. Perhaps it was not worth buying this equipment. It was of no use. However, today this does not matter, and these costs do not affect the company's decisions.

All costs are divided by external and internal. The costs of resources that exist within the firm itself are called internal. If a firm acquires resources from other firms, then this external costs. Domestic costs are equal to the cash payments that could have been received if the best way use of this resource. Part of the profit relates to costs. There is a concept of economic and accounting profit. Accounting profit– the difference between total revenue (TR=P*Q) and external costs. Economic profit is the difference between total revenue and opportunity costs for all resources. Normal profit is a profit that allows a company to remain in a given industry. If opportunity costs exceed income (revenue), then the negative profit value will be called the company's losses. General designation of costs WITH(from English cost – costs, expenses) →

C = F(Q). However, not all costs are the same. There are several types of costs in terms of their impact on output. In the short term, in the very general view allocate Vehicle (total cost) – total costs, including fixed costs (FC) and variable costs ( V.C.). Fixed costs do not depend on the volume of production and can also occur when products are not produced at all, for example, rent, payment of interest on a loan, etc. Variable costs change with changes in output. These are the costs of purchasing raw materials, materials, electricity, etc.

Thus: TC = FC + VC. Average costs – AC = TC/Q.

And FC - average fixed costs. АFC = FC/Q. АVC– average variable costs. AVC = VC/Q. Hence, AC (ATS) = AFC + AVC.

Marginal or marginal costs (MC). Marginal cost represents the increase in costs resulting from producing one additional unit of output.. MS= ΔTC/ ΔQ. Or MC=(TC)" = (dFC/dQ) + (dVC/dQ) = 0 + (dVC/dQ). Since fixed costs do not change with changes in the firm's output. Marginal costs are determined by the growth of only variables . Graphically, the cost relationship will look like this:

As we determined. But, where W is wages, and where L is the value of the variable factor. Then

What explains this behavior of the curves? It is assumed that if there is at least one constant resource, the quantity of which cannot be changed, then with an increase in variable costs for other resources, the average productivity of variable resources first increases (average variable costs fall), and then, starting from a certain volume of output, productivity decreases ( average variable costs are rising).

The type of the average total cost curve is determined, firstly, by the type of the average variable cost curve AVC, constructed on the basis of the law of diminishing returns; secondly, the shape of the average fixed cost curve, given that AFC = ATC-AVC.

If average costs increase, then marginal costs are greater than average costs. If average costs decrease, then marginal costs are lower than average costs. At the lowest point of the average cost curve, marginal cost will equal average cost.

Using the isoquant method to determine producer equilibrium.

The problem of finding the optimal output for a given manufacturer with varying values ​​of input factors of production can be approached graphically using the isoquant method. Suppose that production uses two factors of production: labor and capital (hours of use of labor and machinery or equipment). The price of labor is equal to the rate wages(w). The price of capital is equal to the rental price for equipment (r). Lines reflecting all possible combinations of labor and capital, having a single total value, are called isocosts. Isocost equation: TC= wL + r K. Isocost is a straight line, each point of which shows what combination of two factors of production a firm can purchase at its own expense. The producer's equilibrium will be established at the point where the isocost touches the isoquant. The angular coefficient of the isoquant and isocost are the same here.

In the long run, for a given volume of output, the firm achieves equilibrium in the use of input factors, maximizing profits and minimizing costs, when any replacement of one factor by another does not lead to a decrease in costs per unit of output. This happens when MR K / r = MR L /w. That is, since in the long run all input factors of production can be changed, then for a given volume of production the firm achieves equilibrium in the use of input factors of production and minimizes costs when any replacement of one factor by another does not lead to a decrease in costs per unit of output. This is what happens when the above equality is satisfied.

But all of the above concerns precisely the already given volume of output. And when the company begins to reduce or increase output finished products? That is, in the broadest sense, an enterprise can change the size of production itself in the long term. Let's take for example a small manufacturing enterprise, which, with minimal production capacity, begins to expand its output. Initially, the expansion of output is accompanied by a decrease in average total costs. Then the introduction of new capacity leads to an increase in average total costs. Then An individual firm's long-run average cost (LAC) curve is the sum of portions of its short-run average total cost (SATC) in relation to the size of those enterprises that are built. The LAC curve shows the lowest cost of production per unit of output at which any level of production could be achieved, provided that the firm had sufficient time at its disposal to make all the necessary changes in the size of its enterprises. The LAC curve is called the firm's planning curve (choice curve).

The arcing of the LAC curve is explained by positive and negative scale effects. Positive economies of scale are the effect of mass production or economies of scale (the downward portion of the curve). As the size of the enterprise grows, a number of factors reduce the ATC: 1) labor specialization; 2) specialization of management personnel; 3) efficient use of capital; 4) production of by-products and waste disposal. Diseconomies of scale are associated with certain managerial difficulties in control and coordination of actions large quantity divisions of an expanded enterprise. There are also Various types long-run cost curves.

This section will not discuss the behavior of a perfectly competitive firm as a market structure. We are only talking about a classic company that forms its offer on the market as a seller. A firm's supply curve shows how much output the firm will produce at each possible price. As we saw above, firms will increase output to the point where price equals marginal cost, but will curtail production if price is below average variable cost. Consequently, for a non-zero volume of production, the supply curve of any firm coincides with that part of the MC line that lies above the ABC curve, that is, above the point of minimum average variable costs. Everything above the bankruptcy point corresponds to the prices the company can offer. Increase in market price by general rule encourages firms already in the market to increase production.

Factors influencing supply:

1) prices of resources used in production by a given firm;

2) level of technology (the use of more advanced technology will lead to a reduction in costs and an increase in production volume, that is, the ATC, AVC, MC curves will shift upward);

3) changes in prices for other goods related to this and changes in the number of producers of these goods;

4) state policy in relation to producers of this product.

There is individual supply and supply from the market as a whole. Let all supply factors except price remain unchanged. There are not one, but two sellers on the market for this product. Differences in their supply may be associated with the conditions of their individual production. The market supply volume will be formed by horizontally summing the individual supply volumes of each seller at a given price.

In practice, an increase in production volume entails a change in prices for the resources used. Another situation is also possible: expanding the production of goods stimulates an increase in the production of resources, which in turn can reduce costs. All these situations and others will be considered when analyzing the resource market.

Firms industry produce products in volumes corresponding to the points of minimum values ​​of their short-run average total costs (SATC) curves. For all firms in the industry, their marginal cost of production equals the price of the product.

Firms in the industry also produce products in volumes corresponding to the minimum points of their average cost curves in the long run. When all firms in an industry operate with minimal costs in the long run, that is, all three equilibrium conditions are satisfied, then the industry is considered to be in equilibrium. This means that at a given level of technology development and constant prices for economic resources, each firm in the industry completely exhausts internal reserves optimizes production and minimizes its costs. If neither the level of technology nor the prices of production factors change, then any attempt by the company to increase (decrease) production volumes will lead to losses.

Supply in a perfectly competitive industry

A perfectly competitive firm accepts the price at which it can sell its product as given. It acts as a "price taker" in contrast to imperfectly competitive firms, which are "price takers."

For a market to be perfectly competitive, the following conditions must be met: the presence of many sellers, each of which is small relative to the market as a whole; product uniformity; well-informed buyers; free entry into and exit from the market and independent decisions on the part of both producers and consumers. Some industries, especially agriculture, satisfy these requirements, but the competition model is useful even when these requirements are only approximately met.

A perfectly competitive firm, if it produces anything at all, maximizes its profit by having an optimal positive output level at which the revenue from selling each additional unit (i.e., its market price) equals its marginal cost. This is true for both the short-term (P=MC) and long-term (P=MC) periods.

In the short run, fixed costs do not affect the quantity supplied. A competitive firm, producing a product, maximizes profit only if the price is at least not lower than average variable costs (P≥AVC). Otherwise, the firm can reduce its losses by temporarily stopping production.

A perfectly competitive firm's short-run supply curve coincides with the portion of its marginal cost curve above its exit price, which corresponds to the minimum value of average variable cost.

The short-run market supply curve is obtained by adding (horizontally) the supply curves of all firms in a given market. At each price value, the total quantity supplied is the sum of the quantities supplied by all firms.

In the long run, all factors of production are variable and all costs must be recovered. A perfectly competitive firm produces in the long run only if price is at least as low as long-run average cost (P≥LAC). VS

In this case, the firm leaves the industry.

A perfectly competitive firm's long-run supply curve coincides with the portion of its long-run marginal cost curve that lies above its long-run exit price, which corresponds to the minimum value of long-run average cost.

An industry's long-run supply curve is flatter than its short-run supply curve, both because each firm's long-run supply curve is flatter than its short-run supply curve and because firms can enter and exit the market in the long run.

If all firms use identical technologies and can purchase factors of production at prices independent of industry output, then in the long run they will all have the same average and marginal cost curves.

In the short run, the industry supply curve shifts primarily due to changes in the prices of variable factors. In the long run, shifts in the supply curve are caused by changes in the prices of all factors and changes in technology.

In both the short and long run, the supply curve of a perfectly competitive industry is the industry marginal cost curve.