A. Answer the following questions:

Conditions and criterion of perfect competition.

there are a large number of firms, each of which produces a very small output compared to the output of the industry, 2) all firms produce a homogeneous product, 3) the number of firms can easily change.

The nature of the interaction of firms with each other on the market is determined by the type of market (market structure). The simplest and initial type of market is the market of perfect competition (“pure competition”), the characteristic features of which are: – many buyers and sellers interact in the market; – the products they offer are homogeneous; – firms freely enter or leave the market; – since the share of each competitive firm in the total supply is insignificant, the firm adapts to the price set by the market and cannot regulate it.

Give examples from Russian reality when the conditions of perfect competition are partially met. How big, in your opinion, is the role of this type of market in the economy of our country?

Due to the fact that Russian firms at the initial stages of development did not have large start-up capital, it was small businesses that covered many areas of economic activity. In areas such as, for example, small wholesale trade (a phenomenon characteristic only of Russia) or agriculture, conditions close to perfect competition were created (a large number of firms with homogeneous products and low barriers to entry into the industry). Considering the huge number of these small firms involved in such production, as well as the employees/workers employed in it, it can be said that such an environment has at least a significant impact on the economy of the country as a whole.

What are the fundamental options for the company's behavior in the short and long term?

Short period = this is a period of time during which a firm cannot change the volume of use of certain resources (that is, it cannot completely rebuild its production).

The equilibrium that is established in this short period is, as it were, temporary an equilibrium that lasts only as long as firms cannot change the amount of all resources they use.

Long period is the period of time during which firms can completely rebuild their entire production and best adapt to existing demand. The equilibrium that an industry reaches in the long run may differ significantly from the equilibrium in that industry in the short run.

The phenomenon of bankruptcy and its role in modern Russia.

In order to continue production, a long-term unprofitable company needs to take out loans that it is not able to repay, which ultimately leads to bankruptcy and liquidation of the company (property is transferred to creditors against the will of the owners), thus, this practice disciplines entrepreneurs and deters them from adventurous projects and rash decisions. In Russia, before the adoption of the new law on enterprise insolvency (1998), cases of bankruptcy were extremely rare, and only subsequently did creditors have the opportunity to defend their rights, and a wave of bankruptcies literally swept the economy, which often caused disorganization of the financial sector. In addition, with the legal framework still insufficiently perfect, the bankruptcy procedure often becomes a breeding ground for fraud or a cover for financial fraud. Fictitious bankruptcies are a common occurrence. Thus, it is necessary to adopt legislation that would clearly regulate the conditions for the insolvency of a company, strictly suppress cases of fictitious bankruptcy, but at the same time be liberal enough so that bankruptcies do not become widespread.

What are the ways for Russian enterprises to reach the break-even point?

A huge number of Russian enterprises are currently operating in the zone preceding the first critical point, and are therefore unprofitable. Since an increase in production volumes is possible in most cases only with the beginning of economic growth in the country as a whole, then the most important task there is a decrease in the volume of production at the first critical point. This can be achieved by restructuring the enterprise and reforming production, getting rid of unnecessary equipment, as well as repurposing it to a more profitable type of product. A striking example: GAZ’s success in connection with the release of Gazelles. The assembly shops were able to adapt to the production of profitable and salable products, which helped the enterprise overcome the crisis.

Why does a firm achieve its maximum profit at the point where marginal revenue and costs are equal?

Consider a graph of limit values ​​for a certain company. The difference between these values ​​for a given volume of production is the increase in profit/loss for each additional unit of output produced. While MR>MC, an increase in production volumes brings additional profit (∆Π 1, ∆Π 2, ∆Π 3) up to the point of equality of marginal values, then, in the MC>MR zone, an increase in production volumes increases costs and reduces profits (∆Π 4 , ∆Π 5 , ∆Π 6). Thus, we can conclude that the maximum profit (or, depending on the situation, the minimum loss) is achieved by the company at the point of equality of marginal revenue and costs.

The supply curve of a competitive firm.

Since the competing company is guided in its activities by the “Golden Rule of Optimization,” the volume of production will correspond to the point of equality of marginal costs and marginal revenue. For a competitor's firm, marginal revenue is equal to price, which means that the production volume curve will correspond to the marginal cost curve, with the difference that it does not fall below the minimum average variable cost, because At this price level, production is inappropriate and the company stops it.

What role does the absence of barriers play in establishing zero economic profit in the long run in a perfectly competitive market?

The number of enterprises employed in an industry directly depends on its profitability. If an industry is profitable, then new enterprises enter freely (due to low barriers), the amount of resources and the overall supply of the industry increases, which leads to a decrease in price and overall profitability of the industry. After an industry becomes unprofitable, a number of firms leave it without harm, and a reverse reaction is observed: production decreases, prices rise, and profitability increases. This process continues until the industry returns to the level of zero economic profit, which is observed in the long term. Such a free fluctuation in the number of firms in an industry is possible only in conditions of perfect competition with its low barriers to entry and exit from the industry.

In my opinion, this type of market can be called the most perfect, but with significant reservations. The advantages of perfect competition include industry stability (firms do not incur losses in the long term), balance (optimal allocation of resources leading to the establishment of market equilibrium) and the ability to quickly respond to changing market conditions. On the other hand, perfect competition has a number of significant disadvantages. Firstly, small firms cannot afford high-tech production, much less its development, which is detrimental to the progress of the industry. And secondly, the lack of profits in the long term prevents the influx of new funds, that is, the industry is developing extremely slowly, although all its main indicators are at the optimal level.

B. Describe the relationship between accounting, economic, normal, and zero economic profit. Try to give a graphical interpretation (represent with rectangles of different sizes) of these categories. How will the situation change if normal profit in a crisis becomes negative?

B. Explain why the demand curve for a firm’s product under conditions of perfect competition looks like a horizontal straight line:

Since a competitor firm does not have an independent pricing policy, but accepts the market price, it is a fixed value for it. At the same time, due to the small market share, in conditions of perfect competition, the Firm is not able to satisfy demand by increasing production volume and any quantity of its products will be in demand at the market price. Thus, the demand curve will correspond to a horizontal line at the market price level (perfectly elastic demand)

A perfectly competitive market is characterized by the following features:

The firms' products are homogeneous, so consumers don’t care which manufacturer they buy it from. All goods 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, no matter how small, increase in price by one manufacturer above the market level leads to a reduction in demand for its products to zero. Therefore, the price difference may be the only reason preferences of one company or another. There is no non-price competition.

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

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

Perfect knowledge all market entities. All decisions are made with certainty. This means that all firms know their revenue 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 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 maximizing profits;
• is the standard for assessing the performance of the real economy.

Short-run equilibrium of a firm under perfect competition

Demand for a perfect competitor's product

Under conditions of perfect competition, the prevailing market price is established through the interaction of market demand and market supply, as shown in Fig. 4.1, and determines the horizontal curve of demand and average income (AR) for each individual firm.

Rice. 4.1. Demand curve for a competitor's product

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

The income of a firm that is a perfect competitor

The horizontal demand curve for the products of an individual firm and a single market price (P = const) predetermine the shape of income curves under conditions of 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 that has a positive slope and originates at the origin, since any unit of output sold increases 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. By definition

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 volume of output.

By definition

All income functions are presented in Fig. 4.2.

Rice. 4.2. Competitor's income

Determining the optimal output volume

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

Based on the market and technological conditions existing at a given time, the company determines optimal output volume, i.e. volume of output providing the company profit maximization(or minimization if making a profit is impossible).

There are two interrelated methods for determining the optimum point:

1. Total cost - total income method.

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. 4.3. Determining the optimal production point

In Fig. 4.3, the optimizing volume is located 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 volume of production. The peak of the total profit curve (p) shows the level of output at which profit is maximized in the short run.

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

dп/dQ=(п)`= 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 when the volume of output changes by one unit.

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

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

2. Marginal cost-marginal revenue method.

• Мп=(п)`=dп/dQ,
• (n)`=dTR/dQ-dTC/dQ.

And since dTR/dQ=MR, A dTC/dQ=MS, then total profit reaches its greatest value at such a volume of output at which marginal costs are equal to marginal revenue:

If marginal costs are greater than marginal revenue (MC>MR), then the enterprise can increase profits by reducing production volume. 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 structure, but in conditions of perfect competition it is slightly modified.

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

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

The firm operates in conditions of perfect competition. Current market price P = 20 USD The total cost function has the form TC=75+17Q+4Q2.

It is necessary 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. МR=P*=20.
• 2. MS=(TS)`=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=Р*Q=20Q
• 2. Find the total profit function:
• n=TR-TC,
• n=20Q-(75+17Q+4Q2)=3Q-4Q2-75.
• 3. Define the marginal profit function:
• MP=(n)`=3-8Q,
• and then equate MP to zero.
• 3-8Q=0;
• Q=3/8.

Solving this equation, we got the same result.

Condition for obtaining short-term benefits

The total profit of an enterprise can be assessed in two ways:

• n=TR-TC;
• n=(P-ATS)Q.

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

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

It follows from this that whether a firm obtains profits (or losses) in the short term depends on the ratio of its average total costs (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 positive economic profit in the short term;

Positive economic profit

In the presented figure, the volume of total profit corresponds to the area of ​​the shaded rectangle, and the average profit (i.e. 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 P*<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 break-even, and the firm receives only normal profit.

Zero economic profit

Condition for cessation of production activities

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

• or continue unprofitable production,
• or temporarily suspend its production, but incur losses in the amount of fixed costs ( F.C.) 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 revenues ( 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>АВС,

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

If price equals average variable cost

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

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

Condition for termination of production

Let us prove the validity of these arguments.

By definition, n=TR-TC. If a firm maximizes its profit by producing the nth number of products, then this profit ( pn) must be greater than or equal to the profit of the company in conditions of closure of the enterprise ( By), 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 will the company minimize its losses in the short term by continuing its activities.

Interim conclusions for this section:

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

The relationship between price ( R) and average total costs ( ATS) shows the amount of profit or loss per unit of output if production continues.

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

Short-run supply curve of a competing firm

By definition, supply curve reflects the supply function and shows the quantity of goods and services that producers are willing to offer to the market at given prices, at given time and this place.

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

Competitor's supply curve

Suppose the market price is Ro, and the average and marginal cost curves look like in Fig. 4.8.

Since Ro(closing point), 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 ratio M.C. And M.R.. The very point of the supply curve ( Q;P) will lie on the marginal cost curve.

By successively increasing the market price and connecting the resulting dots, we get the short-run supply curve. As can be seen from the presented Fig. 4.8, for a perfect competitor firm, 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. Definition of a sentence function

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

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

Determine the supply function of a firm under conditions of perfect competition.

Solution:

1. Find MS:

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

2. Let us equate MC to the market price (condition of market equilibrium under perfect competition MC=MR=P*) and obtain:

2+(Q-2) 2 = Por

Q=2(P-2) 1/2 , IfR2.

However, from the previous material we know that the volume of supply Q = 0 at P

Q=S(P) at Pmin AVC.

3. Let us determine the volume at which the average variable costs 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 is equal to 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 ,IfP3;
• Q=0 ifR<3.

Long-run market equilibrium under perfect competition

Long term

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

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

In the long term:

• all resources are variable, which means that it is possible for a company operating in the market to change the size of production, introduce new technology, or modify products;
• change in the number of enterprises in the industry (if the profit received by the company is lower than 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).

Basic assumptions of the analysis

To simplify the analysis, let us assume that the industry consists of n typical enterprises with same cost structure, and that a change in the output of existing firms or a 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 company in the short term looks like curves SATC1 And SMC1(Fig. 4.9).

4.9 Long-run equilibrium of a perfectly competitive industry

Mechanism for the formation of long-term equilibrium

Under these conditions, the firm's optimal output in the short run will be q1 units. Production of this volume provides the company with positive economic profit, since the market price (P1) exceeds the firm's average short-term costs (SATC1).

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

• on the one hand, a company already operating in the industry strives expand your production and receive economies of scale in the long term (according to the LATC curve);
• on the other hand, external firms will begin to show interest in penetration into this industry(depending on the amount 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. 4.9). The market price decreases from P1 to P2, and the equilibrium volume of industry production will increase from Q1 to 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 level q3, then the industry supply curve will shift even further to the right to the position S3, and the equilibrium price will fall to the level P3, lower than min SATC. This will mean that firms will no longer be able to make even normal profits and a gradual decline will begin. outflow of companies into more profitable areas of activity (as a rule, the least effective ones go).

The remaining enterprises will try to reduce their costs by optimizing sizes (i.e. by slightly reducing the scale of production to q2) to the level at which SATC=LATC, and it is possible to obtain a normal profit.

Shift of the industry supply curve to the level Q2 will cause the market price to rise to P2(equal to the minimum value of long-term average costs, Р=min LAC). At a given price level, a typical firm makes no economic profit ( economic profit is zero, n=0), and is only capable of extracting normal profit. Consequently, the motivation for new firms to enter the industry disappears and a long-term equilibrium is established in the industry.

Let's consider what happens if the equilibrium in the industry is upset.

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

If the market price ( R) is set above the average long-term costs of a typical firm, i.e. P>LAТC, then the firm begins to receive positive economic profit. New firms enter the industry, market supply shifts to the right, and with constant market demand, the price drops to the equilibrium level.

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

Basic conditions for long-term 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 the industry cannot reduce total average costs in the long run and make a profit by expanding the scale of production. This means that to earn normal profits, a typical firm must produce a level of output that corresponds to the minimum of long-term average total costs, i.e. P=SATC=LATC.

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

Market supply in the long run

The long-run supply curve of an individual firm coincides with the increasing portion of 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 prices for resources in the industry change.

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

• With fixed costs;
• with increasing costs;
• with decreasing costs.

Fixed Cost Industries

The market price will rise to P2. The optimal output of an individual firm will be Q2. Under these conditions, all firms will be able to earn economic profits, inducing other companies to enter the industry. The sectoral short-term supply curve moves 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 be that resources are abundant, so that new firms will not be able to influence resource prices and increase the costs of existing firms. As a result, the LATC curve of a typical firm will remain the same.

Restoring equilibrium 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 profits. Thus, industry output increases (or decreases) following changes in market demand, but the supply price remains unchanged in the long run.

This means that a fixed cost industry looks like a horizontal line.

Industries with increasing costs

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

A higher price allows firms to make an economic profit, which attracts new firms to the industry. The expansion of aggregate production necessitates an ever-increasing use of resources. As a result of competition between firms, prices for resources increase, and as a result, the costs of all firms (both existing and new) in the industry increase. Graphically, this means an upward shift in the marginal and average cost curves of a typical firm from SMC1 to SMC2, from SATC1 to SATC2. The firm's short-run supply curve also shifts to the right. The process of adaptation will continue until economic profit runs out. In 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, a typical firm chooses a production volume at which

P2=MR2=SATC2=SMC2=LATC2.

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

INDUSTRIES WITH DECLINING COSTS

The analysis of long-term equilibrium of industries with decreasing costs is carried out according to a similar scheme. Curves D1, S1 are 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 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 increases to a level that allows firms to make an economic profit. New companies begin to flow into the industry, and the market supply curve shifts to the right. Expanding production volumes leads to lower prices for resources.

This is a rather rare situation in practice. An example would be a young industry emerging in a relatively undeveloped area where the resource market is poorly organized, marketing is at a primitive level, and the transport system functions poorly. 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 external economy(eng. external economies). It is caused solely by industry growth and 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’s activities and completely under its control.

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

TCi=f(qi,Q),

Where qi- volume of output of an individual company;

Q— the volume of output of the entire industry.

In industries with constant costs, there are no external economies; the cost curves of individual firms do not depend on the industry's output. In industries with increasing costs, negative external diseconomies take place; the cost curves of individual firms shift upward with increasing output. Finally, in decreasing-cost industries, there are positive external economies that offset internal diseconomies 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, the most typical industries are those with increasing costs. Industries with decreasing costs are the least common. As industries grow and mature, those with decreasing and constant costs are likely to become industries with increasing costs. On the contrary, technological progress can neutralize the rise in resource prices and even lead to their fall, which will result in the emergence of a downward-sloping long-term 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.

St. Petersburg State University ITMO

Faculty of KTiU

Department of PKS

Day Department

REFERENCE

On the topic

"Perfect competition"

in the discipline “Structure and fundamentals of activity of enterprises of various forms of ownership”

Teacher: Sazhneva Lyubov Pavlovna

Group 1158

Subgroup No. 3

2009

Introduction……………………………………………………..3

The essence of competition, the conditions of its existence………4

Perfect competition (general concept) …………. 5

Conditions for the existence of perfect competition ……… 6

Does perfect competition exist in a real economy? ……7

References…..9

Introduction

The modern market economy is a complex organism, consisting of a huge number of diverse production, commercial, financial and information structures, interacting against the backdrop of an extensive system of business legal norms, and united by a single concept - market.

By definition market - is an organized structure in which there are producers and consumers, sellers and buyers, where as a result of the interaction of consumer demand (demand is the quantity of a good that consumers can buy at a certain price) and the supply of producers (supply is the quantity of a good that producers sell at a certain price) a certain price) both the prices of goods and sales volumes are established. When considering the structural organization of the market, the number of producers (sellers) and the number of consumers (buyers) participating in the process of exchanging the general equivalent of value (money) for any product is of decisive importance. This number of producers and consumers, the nature and structure of relations between them determine the interaction of supply and demand.

The key concept expressing the essence of market relations is the concept competition (lat. concurrere – collide,

compete) .

Competition is the center of gravity of the entire market economy system, a type of relationship between producers regarding the establishment of prices and volumes of supply of goods on the market. This is competition between manufacturers. Competition between consumers is similarly defined as relationships regarding the formation of prices and the volume of demand in the market. The incentive that motivates a person to compete is the desire to surpass others. Rivalry in markets is about deal making and stakes in the marketplace. Competition is a dynamic (accelerating) process. It serves to better supply the market with goods.

As a means of competition to improve their position in the market, companies use, for example, product quality, price, service, assortment, terms of delivery and payment, information through advertising.

The essence of competition

Conditions of Its Existence

Competition – competition between participants in the market economy for best conditions production, purchase and sale of goods. Such a clash is inevitable and is generated by objective conditions: the complete economic isolation of each market entity, its complete dependence on the economic situation and confrontation with other contenders for the greatest income. The struggle for economic survival and prosperity - law of the market. Competition (as well as its opposite - monopoly ) can only exist for a certain market conditions. Different types of competition (and monopolies) depend on certain indicators of market conditions. The main indicators are :

Number of companies(economic, industrial, trading enterprises having the rights of a legal entity) supplying goods to the market;

Freedom entry of an enterprise into the market and exit from it;

Product differentiation(giving a certain type of product for the same purpose different individual characteristics - by brand, quality, color, etc.);

Firms' participation in market price control.

Market rivalry is classified as follows:

COMPETITION

By way of rivalry

Price

Non-price

According to market conditions

Adjustable

Imperfect

Perfect

Perfect Competition (general concept)

Perfect, free or pure competition is an economic model, an idealized state of the market, when individual buyers and sellers cannot influence the price, but shape it through their input of supply and demand.

Signs of perfect competition:

An infinite number of equal sellers and buyers

Homogeneity and divisibility of products sold

No barriers to entry or exit from the market

High mobility of production factors

Equal and full access of all participants to information (prices of goods)

In the case where at least one sign is missing, competition is called imperfect. In the case when these signs are artificially removed in order to occupy a monopoly position in the market, the situation is called unfair competition.

In Russia, one of the widely used types of unfair competition is the use of administrative resources. This euphemism refers to the receipt by the administration and various representatives of the state of bribes, explicitly and implicitly, in exchange for various kinds of preferences.

David Ricardo identified a natural tendency in the conditions of free competition for the rate of profit to decrease.

In a real economy, the exchange market most closely resembles a perfectly competitive market. In the course of observing the phenomena of economic crises, it was concluded that this form of competition usually fails, from which it can only be overcome thanks to external intervention.

Conditions for the existence of perfect competition

Perfect (free) competition is based on private property and economic isolation. It assumes that there are many independent firms on the market that independently decide what to create and in what quantities, and also :

1 .Production volume of an individual company is insignificant and does not affect the price of the goods sold by this company;

2. Sold by every manufacturer goods are homogeneous;

3. Buyers are well informed about prices, and if someone increases the price of their products, they will lose customers;

4. Sellers act regardless from each other;

5. Market access is not limited by anyone or anything.

The last condition presupposes the opportunity for every citizen to become a free entrepreneur and apply his labor and material resources in the sector of the economy that interests him. Buyers must be free from any discrimination and have the opportunity to buy goods and services in any market. Compliance with all conditions ensures free communication between producers and consumers. Perfect competition is also a condition for the formation of a market mechanism, price formation and self-adjustment of the economic system through the achievement of an equilibrium state, when the selfish motives of individuals to obtain their own economic benefit are turned to the benefit of the whole society. It is easy to see that no real market satisfies all of the above conditions. Therefore, the scheme of perfect competition has mainly theoretical significance. However, it is key to understanding more realistic market structures. And this is its value.

Perfect competition promotes unification and standardization of products. It does not fully take into account the wide range of consumer choices. Meanwhile, in a society that has reached a high level of consumption, diverse tastes develop. Consumers not only take into account the utilitarian purpose of a thing, but also pay attention to its design, design, and the ability to adapt it to their individual characteristics. All this is possible only in conditions of differentiation of products and services, which is associated, however, with an increase in the costs of their production.

I. Fisher pointed out (Irving Fisher (1867-1947) - American economist and statistician) that a small reduction in prices made by one grocer will not completely undermine the trade of another grocer located in another part of the same city, since the market is not for both of them absolutely united. Each has a sales area that is only partially accessible to the other - not only because of spatial distance, but also because each has his own “clientele”, which will not move from one grocer to another just because between them There was a slight difference in prices.

This means that the theory of perfect competition cannot be applied to the process of production and sale of those goods that satisfy not just one human need (for example, food), but a complex of needs. Moreover, with the development of science and technology, this set of needs is steadily increasing (for example, cars, which appeared as a means of transportation, over time began to satisfy the needs for comfort, safety, and prestige).

Does perfect competition exist?

in a real economy?

It is very difficult to find perfect competition in a real economy, since two conditions are necessary for its existence: 1) the lack of benefit in enlarging the size of the company, which makes it possible for the existence of many companies and facilitates “entry” (a small company requires little capital); 2) the impossibility for an individual firm to make its benefit heterogeneous (different from the products of competitors).

Two examples can be given where, as a result of a combination of all these conditions, almost perfect competition was observed.

Production of agricultural products

Firstly, the production of agricultural products does not benefit at all if it is carried out in a large company. There are no economies of scale in production and management costs increase. As the Russian economist A.V. Chayanov wrote, “a person cannot collect the sun’s rays falling on one hundred dessiatines into one,” which means that large agricultural firms will occupy very large territories and will be poorly managed.

Therefore, the most effective form of organizing agricultural production is relatively small enterprises in which there is no management apparatus at all, but only the owner of the company, who cultivates his field himself, at best using the labor of several auxiliary workers.

Secondly, the cost of entry into such an industry is relatively low, since farm capital usually includes the cost of relatively inexpensive tools and buildings. A much more important element is the experience of agricultural production, and therefore the number of farmers cannot quickly increase. But over a “sufficiently” long period over time, nothing prevents the number of firms in this industry from increasing to an arbitrarily large number.

Third, most agricultural products are truly homogeneous. Wheat grown in the Krasnodar region is no different from wheat harvested in the Kursk region.

Finally, modern transport makes it possible for producers scattered over a vast territory to compete. For example, in the United States there are several million farmers operating in conditions of almost perfect competition.

Transport services

Another example of an industry in which perfect competition can exist is the transport services industry.

Market for private taxi services.

In some cities in various countries (including Russia), anyone who owns a passenger car and has purchased a license for this type of activity can organize a company for transporting passengers. Such a company will consist of only one car and one driver. Entry into such an industry is quite easy. Usually in any city there are enough people who already have cars, but for some reason do not have a profitable job. These people can easily use their car to create a company for transporting passengers (all costs for entering the market will consist of purchasing a license and the image of “checkers” on any part of the car).

It’s another matter when a taxi fleet begins to successfully compete with private owners. If he can service the machines more cheaply, he has a cost advantage and can charge lower prices.

Freight transportation market.

In this market, a company can also consist of one person and one truck, which transports any raw materials or finished products ordered by other companies. Of course, the costs of “entry” to this market are somewhat higher than the similar costs of private taxi drivers = after all, you will have to buy a truck. But to do this, you can buy a used car or take out a loan secured by your property.

In particular, such transportation is common in the USA, where they serve the already mentioned agricultural market. Large transport companies also exist, but they deal with long-term and large contracts with large manufacturers who constantly need to deliver raw materials or ship finished products. The business of “private traders” is based on random orders (the farmer exports his harvest not every day, but several times a year, so demand from farmers is periodic). There are about three tens of thousands of such firms in the United States, and the market for their services is also approaching perfect competition

3 2.Advantages and disadvantages of market structure perfect competition 6 3. Task 11 ... literature: 14 Introduction Terms " perfect competition", « perfect market" were introduced into scientific circulation...

Competition

Competition

Plan

1. Competition as the most important element of the market mechanism

2. Perfect (pure competition)

3. Absolute (pure) monopoly

4. Monopolistic competition

1. COMPETITION IS THE CRITICAL ELEMENTMARKET MECHANISM

Anyone who studies the basic economic life of society already knows that a market appears anywhere and everywhere where people come together to buy or sell their goods. In a free market economy, sellers and consumers exchange goods and services in many competing markets. This means that in a business system, each subject acts as a competing party in relation to all other subjects.

So what is competition? “Competition” translated from Latin means a clash, rivalry in any field between individuals (competitors) interested in achieving the same goal. Economic competition- this is the competition of enterprises in the market for consumer preferences in order to obtain the greatest profit, or income. Economic sovereignty of each participant business relations not only makes such clashes with other sovereign entities possible, but also turns this possibility into a necessity. In their quest to satisfy consumer demands, entrepreneurs realize their own economic sovereignty only by entering into mutual competition for consumer attention. Rivalry between buyers, as equal subjects of the economy, also occurs in any state with a market economy. However, in the business system, the main competing parties are entrepreneurs.

Competition is determined by the sovereign right of each of the subjects of business relations to realize their economic potential, and this inevitably leads to a clash between them, to achieving the goals set by entrepreneurs at the expense of infringing on the interests of others business people. In other words, competition in a modern civilized market economy is not at all a competition according to the Olympic principle: it is not victory that is important, but participation.

The counterbalance, the antagonist of competition in the economy is monopoly. A monopoly is usually understood as a large corporation that occupies a leading position in any area of ​​production.

Monopoly also refers to a situation in the market when consumers are opposed by one (individual monopoly) or several producers united by a formal or informal agreement (group monopoly). In this case, a small-sized enterprise that produces the vast majority of products of a certain type may turn out to be a monopolist, and, conversely, a large corporation may not be a monopolist if its share in a given market is not large.

If the product is not sold, if the consumer chose other companies and ignored the products of this one, neither low costs nor high labor productivity will save it. The threat of bankruptcy will become very real. Of course, there is hope for government support, but it cannot be long-term. The struggle for the consumer is an indispensable condition for the existence of any enterprise in a competitive environment.

If a product can be sold, then naturally the question arises about the costs of its production. After all, the income received from the sale of goods must be sufficient to pay workers, ensure sustainable prospects for the development of the enterprise, and form reserves in case of unforeseen circumstances. Therefore, constant improvement of production efficiency is another mandatory requirement for an enterprise operating in a competitive environment. If it does not use all possible reserves, its rivals will do this and thereby receive a significant gain in the competitive struggle.

Certain advantages in competition are provided by participation in government programs that provide guaranteed sales of manufactured products, preferential terms of financing and lending, and additional sources of income. Therefore, competition not only does not exclude the possibility of state regulation of the economy, but even directly creates very favorable conditions for it.

Let us consider the main forms of competition characteristic of a modern market economy.

2. PERFECT(NET)COMPETITION

Perfect competition is formed in conditions where there is a large number of small firms, each of which produces similar goods, and its small size does not affect the level of market prices. Examples include markets for agricultural goods, the stock exchange, and the foreign currency market. Competing firms produce standard, absolutely identical products, and therefore the buyer is completely indifferent from which manufacturer to purchase this product. The standard nature of the product eliminates the need to advertise its quality or other benefits. In a purely competitive market, no firm has virtually any influence on the price level of a given product due to the insignificance of the volume attributable to its share. Therefore, under conditions of perfect competition, the demand curve for a firm's products is always horizontal (i.e., perfectly elastic).

In fact, every competing manufacturer is forced to agree to a price without being able to dictate it. An inflated price will push the buyer to another seller who has the same product, but at a lower price. New firms under these conditions are free to enter and existing firms are free to leave purely competitive industries. Thus, it should be noted that perfect competition must satisfy the following conditions:

There are many buyers and sellers, no single group can influence the market position;

Absolutely identical goods and services are offered for sale. At a given price, the consumer does not care from whom to buy the product - they are all analogues;

All market participants have information about the product equally;

Buyers and sellers can enter and leave the market freely. There are no obstacles - technological, financial or otherwise - that could prevent the emergence of new firms;

Real price levels depend little on the desires of individual economic entities and are established by the market mechanism. A competitive firm cannot set the market price, but can only adapt to it. The seller here is the price taker.

In economic practice, a perfectly competitive market almost never happens. It can be considered as covering only some sectors of the economy (farm agriculture, the service sector), and even then with certain reservations. Only very few markets fully meet these requirements. Such, for example, are the New York Stock Exchange, the American Stock Exchange and similar securities markets, which are good examples perfect competition. For us, not only the region is of significant importance practical application our knowledge in this market, but also the fact that perfect competition is the simplest situation and provides an initial, reference sample for comparing and assessing the effectiveness of real economic processes.

Perfect competition, like a market economy, has a number of disadvantages. Knowing that perfect competition ensures the efficient allocation of resources and maximum satisfaction of the buyer's needs, one should not forget that it comes from the solvent needs of buyers, from the distribution of cash income that has already been established previously.

Perfect competition involves the production of public goods, which, although they bring satisfaction to consumers, cannot be clearly divided, valued and sold to each consumer separately (piece by piece). This applies to public goods such as security public order, maintaining the country's defense capability, etc.

Perfect competition promotes unification and standardization of products. It does not fully take into account the wide range of consumer choices. Meanwhile, in modern society, which has reached a certain level of consumption, various tastes and preferences are developing. Consumers are increasingly paying attention not only to the utilitarian purpose of a thing, but also to its design, design, and maximum compliance with the individual characteristics of each person. All this is possible in the conditions of differentiation of products and services, which is associated, however, with an increase in the costs of their production.

3. ABSOLUTE (PURE) MONOPOLY

ABOUT The limitations of perfect competition are overcome by various types of market structures. Competition in which at least one of the characteristics of perfect competition is not observed is called imperfect. The extreme case is a pure monopoly, when only one firm dominates the industry and its boundaries coincide with the boundaries of the industry. When there are a limited number of firms in an industry, an oligopoly situation occurs. The opposite situation occurs when there are many firms, but each of them has at least a small part of monopoly power. This situation is called monopolistic competition. When there is only one seller in the market, such a market is called absolute, or a pure monopoly. Most often, one company is the only manufacturer of a given product or service provider, therefore, the company and the industry are synonymous. The product of this monopoly is unique in the sense that there are no substitutes for it, therefore, there is no alternative for the buyer in choosing a purchase. You can buy the product only from this monopolist or do without it. The company has the opportunity to set a price for the product that will bring it maximum profit. At the same time, there are practically insurmountable obstacles of both natural and artificial origin for potential competitors to enter this market.

At first glance, such a situation is unrealistic and, indeed, occurs very rarely on a national scale. However, if we take a more modest scale, for example, small town, then the situation where there is a pure monopoly will be quite typical. In such a city there is one power plant, one railroad, one airport, one bank, etc.

An absolute monopoly has the following features:

The only seller. A pure monopoly is an industry consisting of one firm;

The monopoly product is unique; there are no substitutes for it. The product sold by the monopoly is different from all other types of goods, so the buyer is forced to either pay the appointed price or do without this product. There is no urgent need to engage in advertising;

Entry into the industry under conditions of pure monopoly is blocked. Competitors cannot enter a market dominated by a monopoly.

Despite the fact that excessive monopolization is considered illegal, the law allows the existence of a number of legal monopolies. These include public utilities, electric and gas companies, water supply companies, communication lines and transport companies. The state monitors this area especially carefully and regulates its activities.

Imagine the complications that could arise if there were multiple electrical companies operating in your area. Each would need its own power lines, power plants, etc. However, competition provides incentives for businesses to lower prices and improve services. The role of competition in this case is played by the state, regulating the use of communications, the volume of services and the possible price for them.

Artificial barriers include patents and licenses, acting as legal monopolies. Having patented a new product or idea, its author has the right to dispose of it at his own discretion for a certain period of time. Perhaps someone will develop a product or service that is a worthy alternative to the existing invention. Then he can also get a patent and enter into competition.

Patents played a huge role in the development of companies such as Xerox, Eastman Kodak, International Business Machines (IBM), Sony, etc. Entry into the industry can also be significantly limited by issuing licenses.

An example of an absolute monopoly is the invention of Erno Rubik, a teacher of architecture and design at a commercial school in Budapest, known throughout the world as the “Rubik’s cube”. The author sold the license to Ideal Toy Corporation and other companies to produce and sell the famous toy, earning a lot of money from it.

In the USA, over 500 professions are subject to licensing (doctors, taxi drivers, chimney sweeps and many others). The license can be granted to either a private company or government organization(a classic example is the history of the vodka monopoly in Russia).

A monopoly may be based on an exclusive right to a resource (for example, natural factors of production). A textbook example is the activities of the De Beers company, which has long been a monopoly owner of the largest diamond mines in South Africa and therefore controls the world diamond market.

At the turn of the last century, economists gave colorful descriptions of the aggressive activities of monopolies. They can be found, for example, in the works of J. A. Hobson “Imperialism” (1902), R. Hilferding “Financial Capital” (1910), N. I. Bukharin “World Economy and Imperialism” (1915). ) and V.I. Lenin “Imperialism, as the highest stage of capitalism” (1916). However, at present, harsh actions that take advantage of a monopoly position, as well as unfair competition in general, are strictly prohibited in countries with developed market economies, although they are found on the periphery of the civilized world.

Thus, a firm can be called the only producer of an economic good that does not have close substitutes, if it is protected from direct competition by high barriers to entry into the industry.

The strength of the monopoly power of an individual firm, however, cannot be exaggerated. Even a pure monopoly is forced to reckon with potential competition. This competition may intensify due to innovations, the possible emergence of substitute products, competition from imported goods, and competition for consumer dollars from other firms, each of which seeks to increase the share of its products in its budget. A pure monopoly arises on the basis of a market economy and functions in accordance with its laws. One should also not discount antitrust legislation, which exists in all developed countries ah, which will be discussed below.

A monopoly within the administrative-command system is a different matter. Such a monopoly is based on state ownership of the means of production and operates in conditions of limited market conditions and commodity shortages. The administrative-command system develops, as a rule, behind the “iron curtain” of a closed economy and is based on a state monopoly foreign trade. An essential feature of this system is the direct distribution of all basic resources, which also serves as a powerful support for the administrative monopoly. Its end result is gigantomania and the desire to turn the industry into one huge plant.

Obviously, competition threatens an administrative monopoly to a much lesser extent than a pure monopoly in a market economy. Relying on sectoral ministries, giant enterprises, through sectoral research institutes, control and objectively inhibit scientific and technological progress in their country. They are not threatened by competition from substitute goods, since the production of most of them is regulated directly or indirectly by this ministry. The “Iron Curtain” reliably protects them from foreign competitors.

Thus, an administrative monopoly that arises in a non-market environment has much greater monopoly power than an economic monopoly.

An artificial monopoly means the concentration in someone's hands of only the sales market or the production and sales market of a particular product. An artificial monopoly can be accidental, stable and general.

A. An accidental monopoly of a buyer or seller often arises unexpectedly due to a temporary favorable relationship between supply and demand, when an exceptional opportunity arises to manufacture and sell a certain type of product or to have the best production factors in a given industry (equipment, technology or labor). However, the received economic benefits cannot hold on for long due to continuous competition.

B. A stable monopoly is, as a rule, possessed by large associations of entrepreneurs that have captured the main positions in the production and sale of any type of product (they own the largest enterprises, sales markets, etc.).

Since the end of the 19th century. Various forms of stable monopolies began to emerge and became widely developed: cartels, syndicates, trusts, concerns.

IN. The general form of monopolies has arisen since the second half of this century on the basis of the comprehensive (with the help of the state) subordination of the national economy to associations of entrepreneurs, who in most markets turn out to be the main sellers and buyers. At the same time, the state itself acts as the largest monopolist, concentrating in its hands entire industries and production complexes, such as, for example, the military-industrial complex.

Widespread monopolization of the capitalist economy in late XIX- the beginning of the twentieth century was, as we know, a natural result of a large leap in the concentration of industrial production under the influence of scientific and technological progress. However, trends in industrial concentration and monopolization are not constant and unconditional. Recently, the scientific and technological revolution has given rise to another trend - increasing the role of small and medium-sized technically high-quality enterprises. Their share in a number of developed countries is 70-80% of business organizations.

In the United States, “small business” has become widespread. Small and medium-sized firms produce about half of the gross national product and create more than half of new jobs. Compared to large companies, small firms introduce on average 17 times more innovations per dollar of expenditure and create over 90% of new technologies. Their products are purchased by large monopolies that prefer not to take risks in mastering new science and technology.

In our country, until recently, the tendency to enlarge and centralize production was cultivated, despite the fact that the advantages of enlarging production are not unlimited. With the achievement of a certain level of concentration of production, they disappear. However, starting from the stage of industrialization, the development of our national economy followed the path of creating giant enterprises for which the state provided the best economic conditions. Small plants and factories were assigned a secondary role.

For comparison: if in West Germany in 1989, 90% of engineering products were manufactured by enterprises employing less than 1 thousand people, then in our country only 0.05% were manufactured by enterprises that were not members of associations.

This policy has led to an extremely high level of monopolization of production in almost all sectors of our national economy, where all the natural and artificial forms of monopolies discussed above have developed. The state, ministries and departments managing individual sectors of the national economy, giant industrial enterprises, due to natural economic conditions or due to the extraordinary concentration of production, have become monopolists who do not know their competitors in the domestic market.

The monopolization record was, of course, set by Aeroflot of the USSR. This is the world's largest air transport company with a staff of 0.5 million people, numbering 1,650 aircraft and helicopters in 1988, serving 3,600 cities, or 1 million km of air roads. Currently, there are 215 airlines in Russian civil aviation.

The dismantling of the totalitarian nationalization of the economy currently being carried out in our country presupposes the destruction of all types of absolute monopoly. This requires: the elimination of the command-administrative management system, the disaggregation of large and increasing the role of small and medium-sized enterprises, the creation of competitive industries (including collective enterprises and individual farms), the organization of consumer societies, the introduction and operation of antimonopoly legislation that promotes the development of normal competition.

4. MONOPOLYCOMPETITION

Pure competition and pure monopoly are the exception and not the rule in a market system. Most market structures fall somewhere between the two extremes. Firms try to convince customers that their products and services are specific or unique. When many companies sell similar products, explaining that they have “new and improved” qualities, or are intended “especially for professionals,” or they are “the best for the most low price”, the market is no longer freely competitive. Economists call such a market a large number sellers offering similar but not identical products , monopolistic competitionntion.

The differences between monopolistic and pure competition are significant. Monopolistic competition does not require the presence of hundreds or thousands of firms; say, twenty, fifty or seventy are sufficient. The presence of such a number of firms implies several important signs of monopolistic competition. Each firm has a relatively small share of the total market, so it has very limited control over the market price. In addition, the presence large number firms also guarantees that secret collusion and concerted actions of firms to limit production volumes and artificially increase prices are practically impossible. Finally, with the large number of firms in the industry, there is no sense of mutual dependence between them.

One of the main features of monopolistic competition is also the differentiation of the product according to its physical or qualitative parameters. Personal computers, for example, may vary in terms of hardware power, software, clothes - style, materials and workmanship, etc.

An important aspect of product differentiation is the terms and services associated with its sale. The quality of customer service, the services that the seller can provide to them, the turnaround time for orders, after-sales service and warranty periods all determine the buyer's decision to make a purchase. Product differentiation manifests itself in conditions of monopolistic competition in terms of the degree of product availability and their proximity to the buyer. Sometimes he is ready to pay a higher price for a product in a store located “close at hand” than to go for a cheaper one far from the consumer’s place of work or residence. All this is complemented by habits and attachments to certain goods or services.

Monopolistic competition does not have high barriers to entry, and the capital required to start a business is usually small.

Easy entry into the industry does not mean that all restrictions are absent. These may be product patents, licenses, brand marks or trademarks. However, unlike a pure monopoly, patents are not exclusive in nature, since substitute goods are patented (licensed).

So, monopolistic competition is characterized by the following features:

Each firm has a relatively small market share, so it has very limited control over the market price;

In contrast to pure competition, one of the main features of monopolistic competition is product differentiation by quality, packaging, placement, range of services, etc.;

Economic rivalry is based not only on price, but also on price competition. Many companies focus on trademarks and factory marks;

There are no barriers to entry into the industry.

A manufacturer in conditions of monopolistic competition can, by manipulating the product, achieve a temporary advantage over competitors. The same result can be achieved by the manufacturer through advertising and other sales promotion techniques. While product differentiation tailors the product to consumer demand, advertising tailors consumer demand to the product. The purpose of advertising for a company operating in conditions of monopolistic competition is simple. The company hopes to increase its market share and strengthen consumer loyalty towards its differentiated product.

A number of arguments can be made in favor of advertising. First and foremost, advertising provides information that helps consumers make wise choices. Further, it financially supports radio, television, and other means mass media. In addition, advertising tends to focus on beneficial properties product, which forces manufacturers to preserve and improve them, and thus can help expand sales. Advertising is the force that keeps competition going. By providing information about a wide variety of substitute products, advertising tends to weaken monopoly power. Intensive advertising is often associated with the introduction of new products designed to compete with existing brands. Advertising stimulates high levels of consumer spending. It is not needed to sell food to a hungry person, but it is needed to convince families that they need a second car, a VCR or a home computer. Stability in an affluent society requires demand-creating activities, particularly advertising, otherwise high levels of production and employment will not be maintained.

At the same time, one cannot help but see that there are significant flaws in competitive advertising. It may well, in some cases, persuade consumers to pay high prices for highly praised but inferior products, while rejecting better quality but unadvertised products sold at lower prices.

Advertising expenses should be classified as unproductive expenses of society, since they do not add anything to its prosperity, diverting human and material resources to themselves, which, given their limited nature, is very significant. Thus, the three main manufacturers - General Motors, Ford and Chrysler (the Big Three) - recently spent almost two billion dollars on advertising annually. Moreover, by becoming loyal to certain brand names, consumers become less sensitive to price cuts by their competitors and thereby strengthen the monopoly power that the firm advertising its product has.

In general, it should be said that the entrepreneur operating in conditions of monopolistic competition strives for such a special combination of prices, product and sales promotion activities that will maximize his profits.

Thus, non-price competition can be represented as follows (Diagram 1):

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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 the book household appliances or shoes by simply opening the online store website and making a few mouse 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 the exit of firms, that is, the absence of 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 have such differences in production function that would allow him to get competitive advantage above the rest. 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 for the balance of general demand and general offer. Consider two farmers: farmer Ivan produces 10 kilograms of potatoes per day with a marginal cost of $10, and farmer Mikhail produces 20 kilograms with 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, due to the competition of many players in the conditions 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:

Under perfect competition, a firm's marginal revenue is equal to its price.
MR = P

It's easy to prove:

MR = TR Q ′ = (P * Q) Q ′

Since 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 firm in conditions of perfect competition, just 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 neighborhood 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 company to leave the industry instead of producing at the point 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 everything possible options 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 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 us 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, a 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 in this case everything will happen in the opposite direction: since firms earn negative economic profits, some firms will leave the industry, supply will decrease, the price will rise to a level at which the economic profits of firms will not be equal to zero.