Equilibrium of the firm in the short and long run. Equilibrium of a Perfectly Competitive Firm in the Short and Long Runs Short Run Supply Curve of a Competitive Firm

23.03.2022

In the short term

A group of individual competing enterprises selling a certain identical product in the market is industry.

If several enterprises operate on the market, then the total supply of the industry (market supply) at each given price is equal to the sum of the supply volumes of all enterprises in the industry:

S S = S 1 + … + S n.

From the supply curves of individual firms the supply curve of a competitive industry develops. On fig. 11.7 shows just such a process of summing the volumes of proposals of two enterprises BUT and AT at every possible price. Compared to the supply curves of individual enterprises, the market supply curve is shifted to the right, i.e. towards higher supply.

Rice. 11.7. Formation of the industry supply curve

In the short term

The offer of a competitive industry and the market demand for its products are equalized at the equilibrium price (Fig. 11.8)

Rice. 11.8. The equilibrium of a perfectly competitive industry

In the short term

This figure shows a fairly simple diagram of the interaction of supply and demand in conditions of perfect competition. The demand curve for the products of the entire industry has the usual form, corresponding to the law of demand, and thus differs from the demand curve for the products of an individual enterprise in conditions of perfect competition. The demand curve for the products of an individual competitive enterprise turned into a horizontal straight line only because the output volumes of the enterprise are negligible compared to the capacity of the entire industry market.

The point of intersection of the supply and demand curves ( E) sets the equilibrium price ( P e) and the equilibrium supply ( Q e). It is the equilibrium price formed within the entire industry ( P e) is further considered by each competitive enterprise as established given, as a price dictated by the market, which should be put up with, regardless of whether it is beneficial or not.

In addition, the equilibrium point for perfect competition is sustainable. Industry supply curve ( S) is the sum of the supply curves of all enterprises operating in the industry. These businesses are a collection of points that maximize profits at different price levels. This is the property of the marginal cost curve ( MS = S). It follows that enterprises are not interested in deviating from the equilibrium point. After all any point not on the curve MS, does not satisfy the rule MR = MC , which means that it does not allow you to get the maximum profit.

The equilibrium stability of a perfectly competitive enterprise is especially strong in the long run.

Behavior of a perfectly competitive firm

In the long run

In the long run, when all types of costs can change
(including those that were constant in the short term), the decision of the enterprise on the volume of output will be made differently, since you can change all production factors, including the size of the enterprise.

If, at the current market price, several enterprises suffer losses and stop production, the supply in the market is reduced. The result of a reduction in supply with constant demand is an increase in price. The increased price will allow the enterprises remaining in the industry to earn economic profits. In conditions of perfect competition, when there are no restrictions on access to the market, new enterprises will appear, attracted by increased profits. As a result, supply will increase and price will decrease. Under perfect competition, such fluctuations are permanent. Market equilibrium will be reached when enterprises will not have incentives to both enter the industry and exit it. This is achieved under the condition that the market price settles at the minimum of long-term average gross costs and economic profit thus disappears (Fig. 11.9).

Rice. 11.9. The equilibrium of a perfectly competitive firm
in the long run

A perfectly competitive firm produces output in the long run only if price
does not fall below long-term average gross costs
(R ≥ LATS). Accordingly, at a price initially lower than the long-term average gross costs, there are losses and an outflow of enterprises from the industry. When the equality of the price of the goods and the minimum possible average total costs in the long run is achieved, the long-term equilibrium of a perfectly competitive enterprise is achieved.

The behavior of the company, as already noted, is directly related to the results of its activities and the efficiency of both the company itself and the industry as a whole. Every market model strives for efficiency. Consider how efficient a perfectly competitive market is.

The optimal allocation of resources is achieved when their distribution across industries ensures the production of such a set of goods that corresponds to the structure of demand, that is, the final needs of consumers. The value of products for consumers is expressed in their market prices, the value of the resource used is expressed in marginal costs.

Consequently, the comparison of these indicators will reflect the degree to which the distribution of resources corresponds to the needs of society, that is, the optimality of their distribution. The optimal distribution of resources will be achieved when the marginal cost of producing a product is equal to its market price ( MS = R), since in this case the value of the last unit of the product to the buyer is equal to the value of the resources needed to produce it. Efficient use of resources is achieved when the production of goods included in the optimal set is carried out at the lowest production 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, and the production efficiency itself is achieved in the case of establishing long-term market equilibrium at the minimum average long-term costs.

To what extent the market is able to provide movement to an equilibrium state in which these requirements would be met depends on the structural features of the market and the behavior of its participants.

As we now know, a perfectly competitive market is characterized by such structural features (standardization of the product, insignificance of the share of an individual firm in the market supply, unimpeded entry and exit) that firms always offer in accordance with the principle:

MS = P,

and in conditions of long-term market equilibrium produce a product with a minimum average cost:

R = LRACmin.

Therefore, within the framework of the long-term period, the sectoral equilibrium point of a perfectly competitive market corresponds to the position: LRMC = R = LRACmin(Fig. 8.13).

Rice. 8.13 Conditions for the effectiveness of perfect

competitive market

In other words, if a long-term equilibrium is reached in a perfectly competitive market, the optimal allocation of resources is ensured, and production is carried out with minimal average long-term costs. Therefore, for this type of market, both conditions of efficiency are satisfied, and it is cost-effective.

Since all producers will strive for this effect, sooner or later costs will be minimized at all enterprises, and the goods necessary for society will be produced in the cheapest way.

So, a perfectly competitive market has a number of advantages:

He is capable of self-regulation;

Is quite flexible;

Has a high adaptive capacity;

Develops initiative in society, responsibility, entrepreneurial initiative;

Helps to minimize costs.

However, the economic efficiency of a perfectly competitive market should not be regarded as some kind of absolute to which one should aspire. There are some limitations here:

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

secondly, operating at zero economic profit, firms are deprived of a source of development, which becomes an obstacle to scientific and technological progress;

thirdly, with a high capital intensity of production, which initially determines the large size of the company, ensuring the atomistic nature of the market becomes technically unfeasible;

fourthly, in the case of a significant positive effect of scale, when the expansion of production capacity leads to a significant decrease in average production costs, perfect competition becomes undesirable by the very criterion of economic efficiency.

Due to these circumstances, even the most competitive market is not an ideal social structure and has a number of shortcomings and, accordingly, negative consequences.

First of all, the competitive mechanism ensures the "natural selection" of economic agents and leads to economic differentiation of the population, deep property inequality. This not only undermines social stability, but also becomes a powerful factor in increasing the inefficiency of the economy.

The market mechanism leads to the concentration of production and capital and, thereby, contributes to the emergence of monopolistic tendencies.

The market does not always encourage technical and technological innovation. This is due to the fact that the economic and competitive gain achieved as a result of innovations is temporary, there is a desire to “freeze” the innovation, prevent it from spreading among competitors, and monopolize its use.

There is a fairly large group of goods and services that cannot be produced in a purely competitive environment. These are the so-called public goods - national defense, public order, seismological services, rescue of people in emergency situations, etc. Such goods and services can only be provided by the state.

A purely competitive market system in itself does not ensure the elimination of side effects of the production of goods and services - environmental pollution. Commodity producers think only about the growth of income. This task can also be solved only by the state.

Thus, real-life market systems are models of imperfect competition, various variants of a mixed economy with the inclusion of the state in economic life.

A perfectly competitive market is characterized by the following features:

Firms produce the same, so that consumers do not care which manufacturer to buy it from. All products in the industry are perfect substitutes, and the cross-price elasticity of demand for any pair of firms tends to infinity:

This means that any arbitrarily small increase in the price of one producer above the market level leads to a reduction in demand for his products to zero. Thus, the difference in prices may be the only reason for preferring one or another firm. No non-price competition.

The number of economic entities in the market is unlimited, and their share is so small that the decisions of an individual firm (individual consumer) to change the volume of its sales (purchases) do not affect the market price product. In this case, of course, it is assumed that there is no collusion between sellers or buyers to obtain monopoly power in the market. The market price is the result of the combined actions of all buyers and sellers.

Freedom to enter and exit the market. There are no restrictions and barriers - there are no patents or licenses restricting activity in this industry, significant initial investments are not required, the positive effect of scale of production is extremely small and does not prevent new firms from entering the industry, there is no government intervention in the supply and demand mechanism (subsidies , tax incentives, quotas, social programs, etc.). Freedom of entry and exit absolute mobility of all resources, freedom of their movement territorially and from one type of activity to another.

Perfect Knowledge all market participants. All decisions are made in certainty. This means that all firms know their income and cost functions, the prices of all resources and all possible technologies, and all consumers have complete information about the prices of all firms. It is assumed that information is distributed instantly and free of charge.

These characteristics are so strict that there are practically no real markets that would fully satisfy them.

However, the perfect competition model:

allows you to explore markets in which a large number of small firms sell homogeneous products, i.e. markets similar in terms of conditions to this model;

clarifies the conditions for profit maximization;
is the standard for evaluating the performance of the real economy.

Short-run equilibrium of a firm under perfect competition

Demand for a perfect competitor's product

Under perfect competition, the prevailing market price is established by the interaction of market demand and market supply, as shown in Fig. 1 and defines the horizontal demand curve and average income (AR) for each individual firm.

Rice. 1. The demand curve for the products of a competitor

Due to the homogeneity of products and the presence of a large number of perfect substitutes, no firm can sell its product at a price even slightly higher than the equilibrium price, Pe. On the other hand, an individual firm is very small compared to the aggregate market, and it can sell all its output at the price Pe, i.e. she has no need to sell the commodity at a price below Re. Thus, all firms sell their products at the market price Pe, determined by market demand and supply.

Income of a firm that is a perfect competitor

The horizontal demand curve for the products of an individual firm and the single market price (Pe=const) predetermine the shape of the income curves under perfect competition.

1. Total income () - the total amount of income received by the company from the sale of all its products,

represented on the graph by a linear function with a positive slope and originating at the origin, since any sold unit of output increases the volume by an amount equal to the market price!!Re??.

2. Average income () - income from the sale of a unit of production,

is determined by the equilibrium market price!!Re??, and the curve coincides with the firm's demand curve. A-priory

3. Marginal income () - additional income from the sale of one additional unit of output,

Marginal revenue is also determined by the current market price for any amount of output.

A-priory

All income functions are shown in Fig. 2.

Rice. 2. Competitor's income

Determination of the optimal output volume

Under perfect competition, the current price is set by the market, and an individual firm cannot influence it, since it is price taker. Under these conditions, the only way to increase profits is to regulate the volume of output.

Based on the current market and technological conditions, the firm determines optimal output volume, i.e. the volume of output that provides the firm profit maximization(or minimization if profit is not possible).

There are two interrelated methods for determining the optimum point:

1. The method of total costs - total income.

The firm's total profit is maximized at the level of output where the difference between and is as large as possible.

n=TR-TC=max

Rice. 3. Determination of the point of optimal production

On fig. 3, the optimizing volume is at the point where the tangent to the TC curve has the same slope as the TR curve. The profit function is found by subtracting TC from TR for each output. The peak of the total profit curve (p) shows the volume of output at which profit is maximized in the short run.

From the analysis of the function of total profit, it follows that total profit reaches its maximum at the volume of production at which its derivative is equal to zero, or

dp/dQ=(p)`= 0.

The derivative of the total profit function has a strictly defined economic sense is the marginal profit.

marginal profit ( MP) shows the increase in total profit with a change in output per unit.

If Mn>0, then the total profit function grows, and additional production can increase the total profit.
If Mn<0, то функция совокупной прибыли уменьшается, и дополнительный выпуск сократит совокупную прибыль.
And, finally, if Мп=0, then the value of the total profit is maximum.

From the first profit maximization condition ( MP=0) the second method follows.

2. The method of marginal cost - marginal income.

Мп=(п)`=dп/dQ,
(n)`=dTR/dQ-dTC/dQ.

And since dTR/dQ=MR, a dTC/dQ=MC, then total profit reaches its maximum value at such a volume of output at which marginal cost equals marginal revenue:

If marginal cost is greater than marginal revenue (MC>MR), then the company can increase profits by reducing production. If marginal cost is less than marginal revenue (MC<МR), то прибыль может быть увеличена за счет расширения производства, и лишь при МС=МR прибыль достигает своего максимального значения, т.е. устанавливается равновесие.

This equality valid for any market structures, however, in conditions of perfect competition, it is somewhat modified.

Since the market price is identical to the average and marginal revenues of a firm that is a perfect competitor (РAR=MR), then the equality of marginal costs and marginal revenues is transformed into the equality of marginal costs and prices:

Example 1. Finding the optimal volume of output in conditions of perfect competition.

The firm operates under perfect competition. Current market price Р=20 c.u. The total cost function has the form TC=75+17Q+4Q2.

It is required to determine the optimal output volume.

Solution (1 way):

To find the optimal volume, we calculate MC and MR, and equate them to each other.

1. MR=P*=20.
2. MS=(TC)`=17+8Q.
3.MC=MR.
20=17+8Q.
8Q=3.
Q=3/8.

Thus, the optimal volume is Q*=3/8.

Solution (2 way):

The optimal volume can also be found by equating the marginal profit to zero.

1. Find the total income: TR=P*Q=20Q
2. Find the function of total profit:
n=TR-TC,
n=20Q-(75+17Q+4Q2)=3Q-4Q2-75.
3. We define the marginal profit function:
Mn=(n)`=3-8Q,
and then equate Mn to zero.
3-8Q=0;
Q=3/8.

Solving this equation, we got the same result.

Short-term benefit condition

The total profit of the enterprise can be estimated in two ways:

P=TR-TC;
P=(P-ATS)Q.

If we divide the second equality by Q, then we get the expression

characterizing the average profit, or profit per unit of output.

It follows that a firm's profit (or loss) in the short run depends on the ratio of its average total cost (ATC) at the point of optimal production Q* and the current market price (at which the firm, a perfect competitor, is forced to trade).

The following options are possible:

if P*>ATC, then the firm has a positive economic profit in the short run;

Positive economic profit

In the figure, total profit corresponds to the area of the shaded rectangle, and average profit (ie profit per unit of output) is determined by the vertical distance between P and ATC. It is important to note that at the optimum point Q*, when MC=MR, and the total profit reaches its maximum value, n=max, the average profit is not maximum, since it is determined not by the ratio of MC and MR, but by the ratio of P and ATC.

if R*<АТС, то фирма имеет в краткосрочном периоде отрицательную экономическую прибыль (убытки);

Negative economic profit (loss)

if P*=ATC, then economic profit is zero, production is breakeven, and the firm earns only normal profit.

Zero economic profit

Termination Condition

In conditions when the current market price does not bring positive economic profit in the short term, the firm faces a choice:

or continue unprofitable production,
or temporarily suspend its production, but incur losses in the amount of fixed costs ( FC) production.

The company makes a decision on this issue based on the ratio of its average variable cost (AVC) and market price.

When a firm decides to close, its total earnings ( TR) fall to zero, and the resulting losses become equal to its total fixed costs. Therefore, until price is greater than average variable cost

P>AVC,

firm production should continue. In this case, the income received will cover all the variables and at least part of the fixed costs, i.e. losses will be less than at closing.

If price equals average variable cost

then from the point of view of minimizing losses to the firm indifferent, continue or stop its production. However, most likely the company will continue its activities in order not to lose its customers and keep the jobs of employees. At the same time, its losses will not be higher than at closing.

And finally, if prices are less than average variable costs the firm should cease operations. In this case, she will be able to avoid unnecessary losses.

Production termination condition

Let us prove the validity of these arguments.

A-priory, n=TR-TS. If a firm maximizes its profit by producing the nth number of products, then this profit ( n) must be greater than or equal to the profit of the firm under the conditions of closing the enterprise ( on), because otherwise the entrepreneur will immediately close his enterprise.

In other words,

Thus, the firm will continue to operate only as long as the market price is greater than or equal to its average variable cost. Only under these conditions, the firm minimizes its losses in the short run, continuing to operate.

Intermediate conclusions for this section:

Equality MS=MR, as well as the equality MP=0 show the optimal output volume (i.e., the volume that maximizes profits and minimizes losses for the firm).

The ratio between the price ( R) and average total cost ( ATS) shows the amount of profit or loss per unit of output while continuing production.

The ratio between the price ( R) and average variable costs ( AVC) determines whether or not to continue activities in the event of unprofitable production.

Competitor's short run supply curve

A-priory, supply curve reflects the supply function and shows the amount of goods and services that producers are willing to supply to the market at given prices, at a given time and place.

To determine the short-run supply curve of a perfectly competitive firm,

Competitor's supply curve

Let's assume that the market price is Ro, and the average and marginal cost curves look like those in Fig. 4.8.

Insofar as Ro(closing points), then the firm's supply is zero. If the market price rises to a higher level, then the equilibrium output will be determined by the relation MC and MR. The very point of the supply curve ( Q;P) will lie on the marginal cost curve.

By consistently raising the market price and connecting the resulting points, we get a short-run supply curve. As can be seen from the presented Fig. 4.8, for a firm-perfect competitor, the short-run supply curve coincides with its marginal cost curve ( MS) above the minimum level of average variable costs ( AVC). At lower than min AVC level of market prices, the supply curve coincides with the price axis.

Example 2: Defining a sentence function

It is known that a firm-perfect competitor has total (TC), total variable (TVC) costs represented by the following equations:

TS=10+6 Q-2 Q 2 +(1/3) Q 3 , where TFC=10;
TVC=6 Q-2 Q 2 +(1/3) Q 3 .

Determine the firm's supply function under perfect competition.

1. Find MS:

MS=(TC)`=(VC)`=6-4Q+Q 2 =2+(Q-2) 2 .

2. Equate MC to the market price (condition of market equilibrium under perfect competition MC=MR=P*) and get:

2+(Q-2) 2 = P or

Q=2(P-2) 1/2 , if R2.

However, we know from the preceding material that the supply quantity Q=0 for P

Q=S(P) at Pmin AVC.

3. Determine the volume at which the average variable costs are minimal:

min AVC=(TVC)/ Q=6-2 Q+(1/3) Q 2 ;
(AVC)`= dAVC/ dQ=0;
-2+(2/3) Q=0;
Q=3,

those. average variable costs reach their minimum at a given volume.

4. Determine what min AVC equals by substituting Q=3 into the min AVC equation.

min AVC=6-2(3)+(1/3)(3) 2 =3.

5. Thus, the firm's supply function will be:

Q=2+(P-2) 1/2 ,if P3;
Q=0 if R<3.

Long-run market equilibrium under perfect competition

Long term

So far, we have considered the short-term period, which involves:

the existence of a constant number of firms in the industry;
enterprises have a certain amount of permanent resources.

In the long term:

all resources are variable, which means that the company operating in the market can change the size of production, introduce new technology, modify products;
a change in the number of enterprises in the industry (if the profit received by the firm is below normal and negative forecasts for the future prevail, the enterprise may close and leave the market, and vice versa, if the profit in the industry is high enough, an influx of new companies is possible).

Main assumptions of the analysis

To simplify the analysis, suppose that the industry consists of n typical enterprises with same cost structure, and that the change in the output of incumbent firms or the change in their number do not affect resource prices(we will remove this assumption later).

Let the market price P1 determined by the interaction of market demand ( D1) and market supply ( S1). The cost structure of a typical firm in the short run has the form of curves SATC1 and SMC1(Fig. 4.9).

Rice. 9. Long run equilibrium of a perfectly competitive industry

The mechanism of formation of long-term equilibrium

Under these conditions, the firm's optimal output in the short run is q1 units. The production of this volume provides the company positive economic profit, since the market price (P1) exceeds the firm's average short-term cost (SATC1).

Availability short-term positive profit leads to two interrelated processes:

on the one hand, the company already operating in the industry seeks to expand your production and receive economies of scale in the long run (according to the LATC curve);
on the other hand, external firms will begin to show interest in penetration into the industry(depending on the value of economic profit, the penetration process will proceed at different speeds).

The emergence of new firms in the industry and the expansion of the activities of old ones shifts the market supply curve to the right to the position S2(as shown in Fig. 9). The market price falls from P1 before R2, and the equilibrium volume of industry output will increase from Q1 before Q2. Under these conditions, the economic profit of a typical firm falls to zero ( P=SATC) and the process of attracting new companies to the industry is slowing down.

If for some reason (for example, the extreme attractiveness of initial profits and market prospects) a typical firm expands its production to the level q3, then the industry supply curve will shift even more to the right to the position S3, and the equilibrium price falls to the level P3, lower than min SATC. This will mean that firms will no longer be able to extract even normal profits and a gradual outflow of companies in more profitable areas of activity (as a rule, the least efficient ones leave).

The rest of the enterprises will try to reduce their costs by optimizing the size (i.e., by some reduction in the scale of production to q2) to a level at which SATC=LATC, and it is possible to obtain a normal profit.

Shifting the industry supply curve to the level Q2 cause the market price to rise to R2(equal to the minimum long-run average cost, P=min LAC). At a given price level, the typical firm earns no economic profit ( economic profit is zero, n=0), and is only able to extract normal profit. Consequently, the motivation for new firms to enter the industry disappears and a long-term equilibrium is established in the industry.

Consider what happens if the equilibrium in the industry is disturbed.

Let the market price ( R) has settled below the average long run cost of a typical firm, i.e. P. Under these conditions, the firm begins to incur losses. There is an outflow of firms from the industry, a shift in market supply to the left, and while maintaining market demand unchanged, the market price rises to the equilibrium level.

If the market price ( R) is set above the average long run costs of a typical firm, i.e. P>LATC, then the firm begins to earn a positive economic profit. New firms enter the industry, market supply shifts to the right, and with market demand unchanged, price falls to the equilibrium level.

Thus, the process of entry and exit of firms will continue until a long-term equilibrium is established. It should be noted that in practice, the regulatory forces of the market work better for expansion than for contraction. Economic profit and freedom to enter the market actively stimulate an increase in the volume of industry production. On the contrary, the process of squeezing firms out of an over-expanded and unprofitable industry takes time and is extremely painful for participating firms.

Basic conditions for long-run equilibrium

Operating firms make the best use of the resources at their disposal. This means that each firm in the industry maximizes its profit in the short run by producing the optimal output at which MR=SMC, or since the market price is identical to marginal revenue, P=SMC.
There are no incentives for other firms to enter the industry. The market forces of supply and demand are so strong that firms are unable to extract more than is necessary to keep them in the industry. those. economic profit is zero. This means that P=SATC.
Firms in an industry cannot, in the long run, reduce total average costs and profit by scaling up production. This means that in order to earn a normal profit, a typical firm must produce a volume of output corresponding to a minimum of average long-term total costs, i.e. P=SATC=LATC.

In a long-term equilibrium, consumers pay the lowest economically possible price, i.e. the price required to cover all production costs.

Market supply in the long run

The individual firm's long-run supply curve coincides with the rising leg of the LMC above min LATC. However, the market (industry) supply curve in the long run (as opposed to the short run) cannot be obtained by horizontally summing the supply curves of individual firms, since the number of these firms varies. The shape of the market supply curve in the long run is determined by how resource prices change in the industry.

At the beginning of the section, we introduced the assumption that changes in industry output do not affect resource prices. In practice, there are three types of industries:

with fixed costs
with increasing costs
with decreasing costs.

Industries with fixed costs

The market price will rise to P2. The optimal output of an individual firm will be equal to Q2. Under these conditions, all firms will be able to earn economic profits by inducing other firms to enter the industry. The industry short-run supply curve shifts to the right from S1 to S2. The entry of new firms into the industry and the expansion of industry output will not affect resource prices. The reason for this may lie in the abundance of resources, so that new firms will not be able to influence the prices of resources and increase the costs of existing firms. As a result, the typical firm's LATC curve will remain the same.

Rebalancing is achieved according to the following scheme: the entry of new firms into the industry causes the price to fall to P1; profits are gradually reduced to the level of normal profit. Thus, industry output increases (or decreases) following a change in market demand, but the supply price in the long run remains unchanged.

This means that a fixed cost industry is a horizontal line.

Industries with rising costs

If an increase in industry volume causes an increase in resource prices, then we are dealing with the second type of industries. The long-term equilibrium of such an industry is shown in Fig. 4.9 b.

A higher price allows firms to earn economic profits, which attracts new firms to the industry. The expansion of aggregate production necessitates an ever wider use of resources. As a result of competition between firms, resource prices increase, and as a result, the costs of all firms (both existing and new ones) in the industry increase. Graphically, this means an upward shift in the marginal and average cost curves of the typical firm from SMC1 to SMC2, from SATC1 to SATC2. The short run firm's supply curve also shifts to the right. The adjustment process will continue until economic profits dry up. On fig. 4.9 the new equilibrium point will be the price P2 at the intersection of the demand curves D2 and supply S2. At this price, the typical firm chooses the output at which

P2=MR2=SATC2=SMC2=LATC2.

The long run supply curve is obtained by connecting short run equilibrium points and has a positive slope.

Industries with diminishing costs

Analysis of the long-term equilibrium of industries with decreasing costs is carried out according to a similar scheme. Curves D1,S1 - the initial curves of market demand and supply in the short term. P1 is the initial equilibrium price. As before, each firm reaches equilibrium at the point q1, where the demand curve - AR-MR touches min SATC and min LATC. In the long run, market demand increases, i.e. the demand curve shifts to the right from D1 to D2. The market price rises to a level that allows firms to earn economic profits. New companies begin to flow into the industry, and the market supply curve shifts to the right. The expansion of production leads to lower prices for resources.

This is a rather rare situation in practice. An example is a young industry emerging in a relatively undeveloped area where the resource market is poorly organized, marketing is primitive, and the transportation system is poorly functioning. An increase in the number of firms can increase the overall efficiency of production, stimulate the development of transport and marketing systems, and reduce the overall costs of firms.

External savings

Due to the fact that an individual firm cannot control such processes, this kind of cost reduction is called foreign economy(English external economies). It is caused solely by the growth of the industry and by forces beyond the control of the individual firm. External economies should be distinguished from the already known internal economies of scale, achieved by increasing the scale of the firm and completely under its control.

Taking into account the factor of external savings, the function of the total costs of an individual firm can be written as follows:

TCi=f(qi,Q),

where qi- the volume of output of an individual firm;

Q is the output of the entire industry.

In industries with fixed costs, there are no external economies; the cost curves of individual firms do not depend on the output of the industry. In industries with increasing costs, there is negative external diseconomies, the cost curves of individual firms shift upwards with an increase in output. Finally, in industries with decreasing costs, there is a positive external economy that offsets internal uneconomics due to diminishing returns to scale, so that the cost curves of individual firms shift downward as output increases.

Most economists agree that in the absence of technological progress, industries with increasing costs are most typical. Industries with diminishing costs are the least common. As industries with decreasing and fixed costs grow and mature, they are more likely to become industries with increasing costs. On the contrary, technological progress can neutralize the rise in resource prices and even cause them to fall, resulting in a downward long-run supply curve. An example of an industry in which costs are reduced as a result of scientific and technical progress is the production of telephone services.

In the long run, firms, by changing the value of all resources involved in production, seek to optimize their size and minimize long-term average costs. In addition, firms already in the industry have plenty of time to either expand or scale back production capacity. New firms can enter the industry, and old firms can leave it, since entry and exit is free.

The purpose of the following analysis is to describe the adaptations of a competitive firm to changing conditions and to determine the conditions for the firm's long-term equilibrium.

In the long run, for an individual firm, the distinction between fixed and variable costs disappears. In order to increase profits, the firm seeks to reduce average costs, so in the long run it changes its size with changes in production volumes. In a graphical interpretation, this will look like a transition from one short-term average cost curve (for example, PBX 1) to another ( PBX 2), rice. 3.10.

With positive economies of scale, the long-run average cost curve (LAC) has a negative slope. In the case of an increase in the cost of increasing the scale of production, the curve LAC has a positive slope, indicating diminishing returns to scale. Thus, when planning a long-term expansion or reduction in production, the firm seeks to find the optimal size and minimize long-term average costs.

Let us now consider how the equilibrium of a firm changes in the long run with a change in the number of firms in a competitive industry. If, in the short run, the price exceeds the firm's average total cost, then the opportunity for economic profit will attract new firms into the industry. But this expansion of the industry will increase the supply of output until the price falls and equals the average total cost. Conversely, if the price of the good is initially less than the average total cost, the inevitable loss will cause firms to leave the industry. The total supply of products on the market will decrease, again raising the price to parity with the average total cost. Therefore, in the long run, the competitive price will tend to equal the minimum of the firm's average total cost.

Under perfect competition, equilibrium is reached when economic profit is zero. In this situation, there are no incentives to expand or contract output, and there are no incentives for new firms to enter the industry, and for old firms to leave it.

As a result, the long-run equilibrium of the firm is achieved under the condition that: LRMC=LRAC=P(Fig. 3.11).

This triple equality means that:

1. Firms Operate Efficiently with Optimum Use of Capacity (LRMC=LRAC).

2. The output volume is optimal (LRMC=P).

3. Public resources are optimally distributed, because marginal cost is equal to the demand for the product (LRMC=P=D).

4. Economic profit is zero; there are no incentives for the transfer of capital (LRAC=P).

There is a "paradox of profit" - each firm seeks to maximize economic profit, and industry equilibrium occurs when the desired profit is zero.

Long-term industry supply depends on changes in resource prices. If the prices of traditional resources are unchanged, the industry can expand without a significant impact on prices and costs. The expansion and contraction of the industry affects only the volume of production and does not affect the price (Fig. 3.12, a).

If resource prices rise, it means that the industry is using limited specific resources. In this case, expanding the supply of the industry and attracting new firms increases the demand for these resources, and hence their price. Therefore, the long-term costs of firms and prices for finished products will also grow (Fig. 3.12, b).

If resource prices are falling, the long-term supply curve will have a negative slope (Fig. 3.12, c). This is possible when not only the number but also the size of firms in the industry grows. A larger enterprise can purchase more resources at a lower cost. In this case, the long-run average cost decreases, which leads to a decrease in the price.

Thus, the long-run supply of a perfectly competitive industry depends on changes in resource prices and can take the form of a perfectly elastic, ascending and descending curve.

The purpose of the following analysis is to describe the adaptations of a competitive firm to changing conditions and to determine the conditions for the firm's long-term equilibrium.

As a result, the long-run equilibrium of the firm is achieved under the condition that: LRMC=LRAC=P(Fig. 3.11).

This triple equality means that:

1. Firms Operate Efficiently with Optimum Use of Capacity (LRMC=LRAC).

2. The output volume is optimal (LRMC=P).

3. Public resources are optimally distributed, because marginal cost is equal to the demand for the product (LRMC=P=D).

4. Economic profit is zero; there are no incentives for the transfer of capital (LRAC=P).

There is a "paradox of profit" - each firm seeks to maximize economic profit, and industry equilibrium occurs when the desired profit is zero.

Thus, the long-run supply of a perfectly competitive industry depends on changes in resource prices and can take the form of a perfectly elastic, ascending and descending curve.

Equilibrium of the firm in the short and long run. Equilibrium of a Perfectly Competitive Firm in the Short and Long Runs Short Run Supply Curve of a Competitive Firm

Short-run equilibrium of a firm under perfect competition

Demand for a perfect competitor's product

Income of a firm that is a perfect competitor

Determination of the optimal output volume

1. The method of total costs - total income.

2. The method of marginal cost - marginal income.

Short-term benefit condition

Termination Condition

Competitor's short run supply curve

Long-run market equilibrium under perfect competition

Long term

Main assumptions of the analysis

The mechanism of formation of long-term equilibrium

Basic conditions for long-run equilibrium

Market supply in the long run

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