The equilibrium position of the firm. Equilibrium of the firm in the short and long run

In the long run, unlike the short run, all inputs are variable. As a result, the firm has more than in the short run, the ability to change the level of output. On the other hand, the number of firms in an industry may change over the long run. Both of these factors affect the achievement long run equilibrium in a perfectly competitive market.

Under industry in this case is understood as a set of manufacturers - firms offering completely homogeneous goods for sale. The industry is in a state of long-term balanced, when none of the firms seeks to enter or exit the industry, and when none of the firms operating in the industry seeks to increase or decrease its output.

Suppose there are a very large number of firms in an industry with the same marginal and average cost functions. Choosing its level of output, an individual competitive firm focuses on market price(Fig. 10.8).

Rice. 10.8.

In the short run at the market price R x(Fig. 10.8a) the firm chooses output ( q x), corresponding to the point of intersection of the price line and the curve of short-term marginal costs (MC - Fig. 10.86). At the same time, it receives an economic profit equal to the area P x E x MN .

In the long run, the firm has the ability to increase production. At the same time, to maximize profit at the same price (P x) she chooses to release q 2) at which the price is equal to the long-run marginal cost ( LMC). As a result, at a price R x the firm increases its economic profit, which now corresponds to the area P X E 2 FG.

However, all other firms also increase their production, which leads to an increase in market supply (a shift of the supply curve to the right in Figure 10.8a) and a decrease in price. On the other hand, new firms enter the industry, attracted by economic profits, further increasing supply. This increase in supply continues until the supply curve comes from position 5 to position S2(Fig. 10.8a). The price falls to the level R 2, those. to the level of the minimum long-term average costs of an individual firm (Fig. 10.86). Her output is now q2, the long-run average cost of such an output is minimal, and the economic profit earned by the firm disappears. New firms cease to enter the industry, and existing firms lose the incentive to reduce or expand production. Long-term balance has been reached.

On fig. 10.86 it can be seen that in the conditions of long-term equilibrium at perfect competition equality is achieved

In other words, the market price at which a firm sells its output is equal to its long-run marginal cost and, at the same time, its minimum long-run average cost.

Let's summarize:

• under conditions of perfect competition, when firms can freely leave the industry and enter it, no firm is able to earn economic profit in the long run(surplus profit);
• perfect competition leads to efficient use of available resources. The point here is that economically efficient production means output at which the cost per unit of output (long run average cost) is minimal. It is to such output volumes that, in the final analysis, all perfectly competitive firms come.

• It is clear that a perfectly competitive industry is the same abstraction as a perfectly competitive market. Real-life industries - automotive, oil, etc. - produce and sell various goods, although they are more or less close substitutes. 252 Microeconomics
• If you do not understand why this is so, go back to section 10.3.

A competitive firm can occupy a variety of positions in an industry. It depends on what its costs are in relation to the market price of the goods that the firm produces. In economic theory, three general cases of the ratio of average costs (AC) of the firm and the market price (P) are considered, which determine the position of the firm in the industry in the short term - the presence of losses, receiving normal profits or excess profits.

In the first case, we observe an unsuccessful, inefficient firm that incurs losses: its costs AC are too high compared to the price of goods P on the market and do not pay off. Such a firm should either modernize production and reduce costs, or leave the industry.

Rice. 6.8. The company is making a loss

In the second case, the firm achieves equality between average costs and price (AC = P) with the volume of production Q e, which characterizes the equilibrium of the firm in the industry. After all, the function of the average costs of the firm can be considered as a function of supply, and demand, as we remember, is a function of price (P). Here, equality is achieved between supply and demand, i.e., equilibrium. The volume of production Q e in this case is equilibrium. Being in a state of equilibrium, the firm receives only normal profit, including accounting profit, and economic profit is zero. The presence of a normal profit provides the firm with a favorable position in the industry.

The absence of economic profit creates an incentive to seek competitive advantage- for example, the introduction of innovations, more advanced technologies, which can further reduce the company's costs per unit of output and temporarily provide excess profits.

Rice. 8.8. Firm earning excess profits

However, it is possible to more accurately determine the moment when it is necessary to stop increasing production so that the profit does not turn into losses, as, for example, with the output at the level of Q 3 . To do this, it is necessary to compare the marginal costs (MC) of the firm with the market price, which for a competitive firm is at the same time marginal revenue (MR). Recall that marginal costs reflect the individual cost of producing each next unit of goods and change faster than average costs. Therefore, the firm reaches its maximum profit (at MC = MR) much earlier than the average cost equals the price of the goods.

The condition for marginal cost to be equal to marginal revenue (MC = MR) is production optimization rule.

Compliance with this rule helps the company not only maximize profits, but also minimize losses.

So, a rationally operating firm, regardless of the position in the industry (whether it suffers losses, whether it receives normal profits or excess profits), should produce only the optimal volume of products. This means that the entrepreneur will always stop at the volume of output at which the cost of producing the last unit of goods (i.e., MC) coincides with the amount of income from the sale of this last unit (i.e., with MR). We emphasize that this situation characterizes the behavior of the firm in the short run.

In the long run, the industry supply changes. This happens due to the growth or decrease in the number of market participants. If the equilibrium price prevailing in the industry market is above average costs and firms make excess profits, then this stimulates the emergence of new firms in a profitable industry. The influx of new firms expands the industry offer. An increase in the supply of goods on the market leads to a decrease in prices. Falling prices automatically reduce the excess profits of firms.

Prices move up and down, each time passing through a level at which P = AC. In this situation, firms do not incur losses, but do not receive excess profits. Such a long-term situation is called equilibrium.

In equilibrium, when the demand price coincides with average costs, the firm produces according to the optimization rule at the level of MR = MC, that is, it produces the optimal volume of production.

Thus, the equilibrium is characterized by the fact that the values ​​of all parameters of the firm coincide with each other:

AC=P=MR=MC.

Since the MR of a perfect competitor is always equal to the market price P = MR, the equilibrium condition for a competitive firm in the industry is the equality

AC = P = MS.

The position of a perfect competitor upon reaching equilibrium in the industry is shown in the following figure.

Rice. 9.8. Firm in equilibrium

Price function ( market demand) P on the firm's products passes through the intersection point of the AC and MC functions. Since under perfect competition the function of marginal revenue MR of the firm coincides with the function of demand (or price), then the optimal volume of production Q opt corresponds to the equality AC \u003d P \u003d MR \u003d MC, which characterizes the position of the company in equilibrium conditions ( at point E). We see that the firm does not receive any economic profit or loss in the conditions of equilibrium that develops with long-term changes in the industry.

In the long-run (LR - long-run) period, the fixed costs of the firm FC increase when its production capacity increases. In the long term, the expansion of the scale of the company using appropriate technologies gives economies of scale. The essence of this effect is that the long-term average costs of LRAC, having decreased after the introduction of resource-saving technologies, cease to change and remain at a minimum level as output increases. After the economies of scale are exhausted, average costs begin to grow again.

The behavior of average costs in the long run is shown in Figure 10.8, where economies of scale are observed when the volume of production changes from Q a to Q b . Over the long run, the firm changes its scale in search of the best output and lowest costs. According to the change in the size of the firm (the volume of production capacity), its short-term costs AC change. Various options for the scale of the firm, depicted in Figure 10.8 as short-term AC, give an idea of ​​​​how the volume of output of the firm in the long run (LR) can change. The sum of their minimum values ​​is the firm's long-run average cost (LRAC).

Rice. 10.8. The average cost of the firm in the long run

In the long run, the best scale for a firm is that at which short run average cost reaches the minimum level of long run average cost (LRAC). After all, as a result of long-term changes in the industry, the market price is set at the level of the LRAC minimum. Thus, the firm achieves long-term equilibrium. In conditions of equilibrium in the long term, the minimum levels of short-term and long-term average costs of the firm are equal not only to each other, but also to the price prevailing in the market. The position of the firm in a state of long-term equilibrium is shown in Figure 11.8.

Rice. 11.8. The position of the firm in a long-run equilibrium

In the long run, the equilibrium of a competitive firm is characterized by the fact that the optimal volume of production is achieved subject to the equality P = MC = AC = LRAC.

Under these conditions, the firm finds the optimal scale of production capacity, i.e., optimizes the long-term output.

Note that economic profits under perfect competition are short-term. Being in a state of long-term equilibrium, the firm receives only normal profit.

In this position, the average and marginal costs of the firm coincide with the equilibrium price in the industry, which has developed when the industry-wide supply and demand are equalized. Note also that the condition for profit maximization is the equality of marginal revenue and marginal cost and the maximum gap between total income and total cost.

Riyo. 6-15. Firm production and profit maximization
is a straight line from the origin (see Fig. 6-4), and total costs are obtained by summing the curves of fixed and variable costs (see Fig. 6-11). ,
By connecting both graphs, it is easy to understand the extent to which the activity of the enterprise that generates income varies. The maximum profit is made when the gap between TR and TC is the largest (segment AB). Points C and D are points of critical production volume. Before point C and after point D, the total costs exceed the total Income (TC gt; TR), such production is economically unprofitable and therefore inexpedient. It is in the interval of production from point K to point N that the entrepreneur makes a profit, maximizing it with an output equal to OM. Its task is to gain a foothold in the nearest neighborhood of point B. At this point, the slopes of marginal revenue (MR) and marginal cost (MC) are: MR = MC. Thus, the condition for profit maximization is the equality of marginal revenue to marginal cost. "
Comparison of marginal revenue with marginal costs can be carried out directly (see Fig. 6-16). Production should be continued until the point of intersection of the marginal cost curve with the price level (MC = P), since under conditions of co-
In perfect competition, the price is formed independently of the firm and is perceived as given, the firm can increase production up to those. until the marginal cost is equal to their price, If MS.lt; P, then production can be increased if MC gt; P, "then such production is carried out at a loss and should be stopped. In fig." 6=-16 total income (TR = PQ) is equal to the area of ​​the rectangle 0MKN. The total cost of TS is equal to the area 0RSN, the maximum total profit (ymax = TR - TS) represents the area of ​​the rectangle MRSK.


Rice. 6-16. Costs and profits of a competitive firm in the short run
In short-term equilibrium, four types of firms can be distinguished (see Figure 6-17). The firm that manages to cover only average variable costs (AVC = P) is called the marginal firm. Such a firm manages to be “afloat” only for a short time (short-term period). In the event of a price increase, it will be able to cover not only current (average variable costs), but also all costs (average total costs), i.e., receive a normal profit (like an ordinary premarginal firm, where ATC = P).
In the event of a price decrease, it ceases to be competitive, since it cannot even cover current costs and will be forced to leave the industry, being outside it (an outrageous firm, where AVC gt; P). If the price is greater than the average total cost (ATS lt; P), then the company, along with normal profit, receives excess profit.

C, P Costs and price
0
C, R
Costs and price
6 0 Quantity, Q
Rice. 6-17. Classification of Firms under Short-Run Equilibrium
Equilibrium of the firm
in the long run, the ma can change all its resources (all
factors become variable), and the industry can change the number of its firms. Since the firm can change all its parameters, it seeks to expand production, reducing average costs.
In the case of increasing productivity, the average total costs decrease (see the transition from ATC to ATC2 in Fig. 6-18) with decreasing productivity, they increase (transition from ATC3 to ATC,).

By connecting the minimum points ATC/, ATC2, ATC3,..., ATCSp, we obtain the average total costs in the long run ATC/. If there is a positive scale effect, then the long-run average cost curve has a significant negative slope; if there is a constant return to scale, then it is horizontal; finally, in the case of an increase in the cost of increasing the scale of production, the curve rushes up (see Fig. 6-19 a). In different industries, this happens in different ways (see Fig. 6-19 b, c).


products
Rice. 6-19. Different Types of Long Run Average Total Cost Curves
The growth of production in the long run, the entry of new firms into the industry may affect the prices of resources. If an industry uses non-specific resources (which are demanded by many other industries), then the price of the resource may not rise. In this case, the costs remain unchanged (see Figure 6-20).
However, in most industries, additional demand for a resource drives up its price (Figure 6-21). Finally, there are industries with declining costs in the long run. Such a decline is usually associated with an increase in the scale of production, due to which the demand for resources is relatively reduced. In that

Rice. 6-20. Industry supply curve with fixed costs perfectly elastic in the long run

Rice. 6-21, The supply curve of an industry with increasing costs is upward in the long run.
In this case, the price of the resource decreases (we hope that the reader can easily build a similar graph on his own).
Let's summarize. Under conditions of perfect competition in the long run (Fig. 6-22), the maximum profit is achieved when the equality is satisfied:
MR = MC = P = AC. (6.9)
Its economic meaning will become clear after comparing completely competitive market with a market where the conditions of perfect competition are violated to a greater or lesser extent. But we will talk about this in the next chapter.

Rice. 6-22. Equilibrium position of a competitive firm in the long run

rational behavior for a commercial firm is considered to be one that provides maximum possible profit.

The choice of behavior model is determined two main circumstances :

. temporary factor(short or long period);

. type of competition(perfect or imperfect).

IN A SHORT PERIOD if it is required to increase the volume of production, the firm can achieve this, increasing only variable factors(labor, materials, raw materials, etc.). The firm does not have time to change the constant factors (size of buildings, number of cars).

IN THE LONG PERIOD the behavior of the firm is different: in response to a constantly changing level of production, it has the ability to change all factors of production. Therefore, they all become variables. During this period, the company seeks to minimize costs by combining factors, replacing labor with capital, and vice versa.

The influence of the type of competition on firm behavior is more complex.

Consider rational behavior firms in conditionsPERFECT COMPETITION.

In a perfectly competitive market, none of the firms on the price of their products. What can an entrepreneur do to get maximum profit? It can only change the volume of production. The next question then arises: how much product should the firm produce and sell in order to maximize profits? To find the answer to this question, it is necessary to compare the market price of the product and the marginal cost of the firm. If a firm increases its output by one, two, three, etc., then each successive unit (say, each new TV set) will add something to both total revenue and total costs. It is something" - ultimateincome And marginal cost.

If marginal revenue is greater than marginal cost, then each new TV set produced adds more to total revenue than it adds to total cost. So the difference between marginal revenue (marginal revenue — MR) and marginal cost (marginal cost- MS) i.e. profit (profit- R), - increases:

P = MR- MC.

The opposite happens when marginal cost is higher than marginal revenue.

Output:The maximum total profit is reached whenequality occurs between price and marginalcosts: R = MS.

If R > MS, the production needs to be expanded.

If R< МС, then production should be reduced.

The equilibrium point of the firm and maximum profit is reachedwhen marginal revenue and marginal cost are equal.

When the firm has reached this ratio, it will not increase production, output will be stable, hence the name "balance of the firm": MS= MR.

Rational behavior of the firmunder conditions of PERFECT COMPETITION OTHER.

In a monopoly market, the firm controls the price of its products.

If in a market of perfect competition the additional income from the sales of successive units of production is unchanged and equal to the market price, then in a monopolistic market an increase in sales reduces the price, and hence the additional, i.e. marginal, income (marginal revenue — MR). This arises because, in a saturated market, a monopolist can only increase production by lowering prices.

Exists two ways to determine the volume of production at which the firm will receive the maximum profit .

With the first method compare gross income and gross costs for each volume of production.

With the second method determine the optimal level of production by comparing marginal revenue and marginal cost.

Output: in order to get the maximum profit in terms of imperfect competition, production and sales volumes should be increased until the marginal cost associated with the production of each additional unit of output is less than the marginal revenue received from the sale of this unit of output: if MR > MC, production should be expanded; if MR< МС, production should be reduced; if MR = MS, the firm earns the maximum profit.

6.2. General condition firm balance. Equilibrium of a firm in the short run under perfect competition.

The firm is in equilibrium when it has no incentives to change the volume of production and supply. The purpose and motive of the company is profit, therefore the equilibrium state of the firm is identical to obtaining the maximum profit.

Profit is the difference between the firm's total revenue and total costs. The condition of maximization of the first order (necessary) is, as is known (from mathematics), the equality of the first derivative to zero, i.e. in our case:

. Because
, but
, then the necessary condition for profit maximization takes the form:
.

In this way, The firm maximizes profit by producing the output at which marginal revenue equals marginal cost.

This general condition is modified depending on the type of market structure in which the firm operates.

So, firm behavior in a perfectly competitive environment (perfect competitive firm) in the short run is determined by the fact that the market has a large number of sellers producing homogeneous products. These conditions result in three main characteristics of a perfectly competitive firm.

First, all firms operating in a perfectly competitive market are price takers. Since there are many sellers in the market, the sales volume of each individual firm is a small part of the total market supply, and therefore none of them can influence the market price. Consequently, the market price, being formed as a result of the interaction of aggregate market demand and supply, acts for each individual firm as a value given from outside, independent of it.

Second, the demand for the product of a perfectly competitive firm is infinitely elastic. Since homogeneous products are bought and sold on the market, even a small change in the price of one of the firms will lead to a complete switch in demand for the products of other firms and, consequently, to an infinite change in demand for the products of this firm. This means further that the demand curve for the product of a perfectly competitive firm has the form of a straight line parallel to the x-axis and spaced from the origin by the market price.

Thirdly, the marginal revenue of a perfectly competitive firm is equal to the price and is the same as the average revenue:- since the price is set by the market and is constant, each additional unit of the product is sold at the same price as the previous one, and the average income is always equal to the price.

Because
, then under perfect competition the necessary condition for profit maximization takes the following form:

Graphically, this condition can be represented as follows (Fig. 6.2.1).

It can be seen from the graph that the curve
, since it is convex to the x-axis, it has two points of intersection with the price line (
And
). That is, the profit maximization condition performed for two cases. To distinguish between these two cases, a second-order (sufficient) maximization condition is used, according to which the second derivative must be less than zero:
or:

. The left side of the inequality characterizes the slope of the curve
, and the right one is the slope of the curve
. Therefore, the profit maximization condition of the second order (sufficient) is: profit is maximized when the slope of the marginal cost line (
) more the slope of the marginal revenue line (
), i.e. curve
must cross the curve
from below.

Rice. 6.2.1. Equilibrium of a perfectly competitive firm in the short run

And since the slope of the marginal revenue curve is zero (the price does not depend on the volume of output), the second-order condition can be represented by the inequality:
. It means that profit will be maximum if at the point of intersection with
curve
has a positive slope. Therefore, at the point
the firm maximizes profit, and at the point
– maximizes losses (negative profit).

6.3. Determining the amount of profit in conditions of perfect competition. Economic profit, normal profit, loss and closing point of the firm. Long-run equilibrium condition for a perfectly competitive firm.

A perfectly competitive firm is in equilibrium when . This condition allows us to determine the equilibrium volume of production, i.e. the quantity of output that the firm produces to maximize profits. But on the other hand, the amount of profit in this case remains unknown. In order to find it, you need to know the average costs, because
. Several situations are possible here.

1. Profit maximization situation: market price is greater than average cost
- rice. 6.3.1).

Since in this case the price is greater than the average cost, the proceeds from the sale not only reimburse all the costs of the company's production, but also allow it to make an economic profit: . The price is greater than the average cost by
. Multiplying this value by the volume of output, we get the amount of profit. Graphically, this is the area of ​​a rectangle.
.

2. The situation of self-sufficiency: market price equals average cost: (
- rice. 6.3.2). Since in this case the price is equal to the average cost, the proceeds from the sale compensate for all costs, but nothing remains beyond this. This means that the firm has no economic profit, but earns a normal profit as part of the cost of production:.

3. Loss minimization situation: the price is greater than the average variable costs, but less than the average total costs (- Fig. 6.3.3).

In this case, the sales revenue will cover the variable and part of the fixed costs, but at the same time, the total average costs will not be fully compensated, and therefore the company will incur losses. The price in this case is less than the average cost by the amount
. Multiplying this value by the volume of output, we obtain the total loss: the area of ​​the rectangle
.

If the firm suffers losses, then it faces a choice:

1) The firm can continue to produce a certain amount of output. This situation is depicted in figure 6.3.3. Since in this case the price exceeds the average variable costs, the firm receives income equal to the area of ​​the rectangle
. If the firm did not produce anything (would stop production), then its losses would be the area of ​​the rectangle
. But if it produces a volume of output , then its losses are reduced to the size of a rectangle
.

2) The firm decides to stop production or to close itself if the price falls below the minimum average variable cost:
(Fig. 6.3.4).

In this case, the firm cannot recover not only the average total, but also the average fixed costs. From the analysis of various equilibrium situations of the firm in the short run, we can conclude that the firm's supply curve in this period is the part of the marginal cost curve that lies above the average variable cost curve.

In the short run, profit maximization conditions are satisfied at a level of production at which the market price is greater than, equal to, or less than average cost. Accordingly, the firm earns economic profit, normal profit or incurs losses. This also determines the behavior of the firm in the long run in the perfect conference market. If firms in a perfectly competitive market make economic profits, this will attract new firms to the market. The entry of new firms increases the market supply, as a result of which the price decreases. When it reaches its minimum
firms in the industry will earn normal profits. If the price drops below the low