Perfect competition. Types of market structures: perfect competition, monopolistic competition, oligopoly and monopoly Short-run equilibrium of a firm under perfect competition

Main features:

1. The presence of a large number of firms, many buyers and sellers; no price discrimination; producers and sellers adapt to existing prices and act as price takers. The demand curve for a firm's products is always horizontal (perfectly elastic).

2. There is mobility of all resources, which implies freedom of entry into and exit from the industry.

3. Homogeneity of goods and services, i.e. production of standard products and absolute awareness of producers and consumers.

4. Free access to information about market conditions, prices, costs, etc.

The firm maximizes its profit by choosing the volume of production at which MR = MC = P. If the price of the product in the short-term time interval exceeds average costs, then the firm receives economic profit. If price equals average cost, then the firm receives normal (zero) profit . If the market price is lower than average cost, the firm incurs losses. Production stops temporarily if the price of a good falls below the minimum average variable cost ( closing points ).

For a long period this is impossible, because in conditions of free entry and exit from an industry, high profits attract other firms to this industry, and unprofitable firms leave the industry. In conditions of perfect competition in the long run, equality is observed:

MR = MC = AC = P.

Perfect competition helps to allocate limited resources in such a way as to achieve maximum satisfaction of needs. This is ensured under the condition that P = MC. This provision means that firms will produce the maximum possible amount of output until the marginal cost of the resource is equal to its price. Perfect competition forces firms to produce products at the minimum average cost and sell them at a price corresponding to these costs.

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. Thus, the difference in prices may be the only reason for preferring one or another company. 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 profit;
• 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. 1, and determines the horizontal demand curve and average revenue (AR) for each individual firm.

Rice. 1. Demand curve for a competitor’s products

Due to the homogeneity of products and the presence of a large number of perfect substitutes, no firm can sell its goods at a price even slightly higher than the equilibrium price, Pe. 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. A-priory

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

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

A-priory

All income functions are presented in Fig. 2.

Rice. 2. Income of a competing company

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. 3. Determination of the optimal production point

In Fig. 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 equal to 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 increases, 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=MC, 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:

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.

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.

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:

• P=TR-TC;
• P=(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;

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);

if P*=ATC, then economic profit is zero, production is break-even, and the firm receives only normal 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.

Let us prove the validity of these arguments.

A-priory, 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.

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 it is necessary or not to continue activities in the event of unprofitable production.

Short-run supply curve of a competing firm

A-priory, 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 a given time and place.

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

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

Because the 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.

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

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

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 = P or

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

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

Q=S(P) at Pmin AVC.

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

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

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

4. Determine what min AVC 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 ,If P3;
• Q=0 if R<3.

Long-run market equilibrium under perfect competition

Long term

So far we have considered the short-term period, which 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).

Rice. 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. 9). The market price decreases from P1 before P2, and the equilibrium volume of industry production will increase from Q1 before Q2. Under these conditions, the economic profit of a typical firm falls to zero ( P=SATC) and the process of attracting new companies to the industry is slowing down.

If for some reason (for example, the extreme attractiveness of initial profits and market prospects) a typical firm expands its production to 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-run 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.

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 by 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 in the long run remains unchanged.

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

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.

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.

Due to the fact that an individual company 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 industries with decreasing costs, there are positive external economies that offset the 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, industries 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, resulting 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.

There is a powerful factor that dictates the general conditions for the functioning of a particular market - the degree of development of competitive relations in it. Competition mechanisms reach their maximum degree of development in a perfectly competitive market. The terms “perfect competition” and “perfect market” were introduced into scientific circulation in the second half of the 19th century. Among the authors who first used the concept of “perfect market” is W. Jevons. Representatives of classical political economy, when characterizing market regulation, relied on the concept of free (unrestricted) competition, incompatible with any restrictions or monopolistic tendencies.

Perfect competition: concept and main features

The nature of the interaction of firms with each other in the market is determined by the type of market (market structure). Market structure - this is a certain type of structure of an industry market with its inherent manifestations of such key characteristics that predetermine the behavior of market participants and equilibrium parameters, such as the number of market agents (sellers and buyers), their awareness and mobility, the type of products produced, conditions for entering and exiting the market . Depending on the specific manifestations of these characteristics, it is customary to distinguish four main types of market structures :

• 1) pure (perfect) competition;
• 2) monopolistic competition;
• 3) oligopoly;
• 4) pure (absolute) monopoly.

They are presented in descending order of competition. The last three types of market are referred to under the general term "imperfect competition" and will be discussed in the next chapter.

The simplest and most basic type, or model, of a market is a perfectly competitive market. Perfect competition represents an ideal image of competition, in which there are many sellers and buyers with equal opportunities and rights in the market. Moreover, the influence of each participant in the economic process on the overall situation is so small that it can be neglected.

Perfect competition has the following main features.

• 1. Numerous market entities. There are a large number of small sellers and buyers in the market. Because of this, sales (or consumer purchases) made by the seller are negligible compared to the total market volume (less than 1% sales or purchases for any period).
• 2. Product homogeneity. This means that the products of competing firms are homogeneous and indistinguishable, i.e. These products from different companies are considered by the buyer as exact analogues. Since the goods are the same, the consumer does not care which seller he buys them from. Due to the homogeneity of products, there is no basis for non-price competition, i.e. competition based on differences in product quality, advertising or sales promotion.
• 3. Lack of price control. The large number of producers and consumers of homogeneous products actually predetermines that, with perfect competition, market participants are not able to influence prices. When one seller sets a higher price for a product, buyers freely switch to its many competitors. If an individual seller sets a price below the usual level, then the goods sold at such a price will not be able to significantly satisfy the demand of buyers and will disrupt free competition among them. In a perfectly competitive market, both buyers and sellers are price takers, they “agree” with the price, take it for granted.
• 4. No barriers to entry or exit from the market. New firms are free to enter and existing firms are free to leave purely competitive markets (industries). There are no serious obstacles - legislative, financial or otherwise - that could prevent the emergence of new firms and the sale of their products in competitive markets. The absence of barriers means that resources are completely mobile and move seamlessly from one activity to another.
• 5. Full awareness of market participants about its current state. Comprehensive information about prices, technology, supply and demand of goods, and profit margins is available to everyone. There are no trade secrets, unpredictable developments, or unexpected actions of competitors. Decisions are made by buyers and sellers in conditions of complete certainty regarding the market situation.

These conditions can hardly be met by any of the actually functioning markets. Even the most similar markets to perfect competition (the market for grain, securities, foreign currencies) only partially satisfy them. In real life, there are always some bureaucratic or economic restrictions on entering the industry and starting a business. There are many brands that differentiate products. Even if there are many sellers in an industry, there is often a dominant firm that has market power and dictates prices.

Thus, the listed conditions are largely assumptions that are never fully satisfied in the real world.

Therefore, we can only speak of a perfectly competitive market as a scientific abstraction that allows us to more clearly reveal the unlimited action of market laws. Nevertheless, for all its abstractness, the concept of perfect competition plays an important role in economic science.

First, there are industries that operate under conditions close to perfect competition. For example, agriculture is more consistent with this type of market than with any other market structure. Therefore, the model of a perfectly competitive market makes it possible to judge the principles of operation of many small firms selling homogeneous products.

Secondly, being the simplest market situation, perfect competition provides an initial sample, or standard, for comparison with other types of markets and for assessing the effectiveness of real economic processes.

Let us find out how a company operates in practice, provided that it is surrounded by a perfectly competitive market, and the behavior of the company will be different in the short and long term.

MARKET OF PERFECT COMPETITION

Each sector of the economy can act in a specific market structure. It characterizes the conditions in which competition occurs. These conditions can be free, when none of the market participants can influence its conditions, or non-free.

In the latter case, some enterprises control a large share (part) of the market for the production and sale of a certain product and therefore can dictate their terms to it. In accordance with this, they distinguish two types of markets: perfect and imperfect competition.

Perfect competition occurs in a market where none of the participants can influence the market price and the volume of supply and demand.

Competition among producers in a given market (on the supply side) is called polypoly, which means “many sellers”, and competition between buyers (on the demand side) - polypsony, that is, “many buyers.”

A perfectly competitive market is characterized by the following main features:

- unlimited number of independent sellers and buyers goods in a competitive industry (several hundreds or thousands), with each seller having a limited market share;

- absolute product homogeneity means that the goods offered for sale have the same standard properties with regard to quality, packaging and appearance;

- absolutely free access to the market new enterprises and free exit of existing companies;

- absolute mobility, that is, freedom of movement of all factors of production, the ability to get rid of excess resources or attract additional factors;

- complete overview (transparency) of the market means that sellers and buyers are informed about prices, quality of goods, volumes of demand and supply, that is, they make decisions under conditions of certainty;

- the conditions of competition are the same for all market participants, competition must not be allowed to create advantages for someone arising from friendship or differences in the delivery time of goods.

In a perfect market, sellers and buyers meet not only in the same place, but also at the same time, so that each of them can react without delay to all changes in the market. A striking example of such a market is the commodity, currency and stock exchanges. The price of a specific product in a market of perfect structure is set depending on supply and demand. Each individual seller and buyer cannot directly influence it.

For example, if the seller asks for a high price, all buyers will go to his competitors, but if the seller asks for a lower price, then the main demand will be focused on him, which he is not able to satisfy due to his insignificant market share. Therefore, the seller adapts to the market by adjusting the volume of sales. He determines the quantity he intends to sell at a given price. It is still possible to change the price if all sellers act together.

Demand in this market is quite stable, that is, there are no sharp fluctuations in demand. Buyers do not care which manufacturer they buy the product from, since it is standard. It turns out that both sellers and buyers have no choice at what price to sell or buy a product. They can only do this at the prevailing market price.

Market of perfect (pure, free, ideal) competition is a favorite market of economists in which they study the behavior of producers and consumers. Although this market is a theoretical model, it is of great practical importance because it can explain the real situation in markets close to perfect competition. Economists include markets for securities, currencies, branded gasoline, wheat, corn, milk and meat, cotton and wool, vegetables and fruits. Many economic theories, in particular supply and demand, are constructed in relation to a perfectly competitive market. In addition, it is a benchmark, a model for comparison with other markets.

Supply under conditions of perfect competition.

Let us assume that we have a market in which there is perfect competition. Perfect competition in the market is determined by two main characteristics:

All products offered by sellers are approximately the same.

There are so many buyers and sellers that no one buyer or seller can influence the market price. Because in perfect competition buyers and sellers must take the market price as a given, they are called price takers.

In real life, the definition of perfect competition perfectly fits such markets as the securities market, foreign currencies, and the wheat market, when thousands of farmers sell grain, and millions of buyers consume wheat and products made from it. No buyer or seller influences the price of wheat; everyone takes it for granted.

In reality, perfect competition is quite rare, and few markets come close to it. Of significant importance was not only the area of ​​practical application of our knowledge (in these markets), 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.

Of course, within a short period of time, under conditions of perfect competition, a firm can earn excess profits or incur losses. However, for a long period, such a prerequisite is unrealistic, since in conditions of free entry and exit from the industry, too high profits attract other firms to this industry, and unprofitable firms go bankrupt and leave the industry.

Perfect competition helps to allocate limited resources in such a way as to achieve maximum satisfaction of demand. This is ensured under the condition that P = MC. This provision means that firms will produce the maximum possible amount of output until the marginal cost of the resource is equal to the price for which it was purchased. This achieves not only high efficiency in resource allocation, but also maximum production efficiency. Perfect competition forces firms to produce products at the minimum average cost and sell them at a price corresponding to these costs. Graphically, this means that the average cost curve is just tangent to the demand curve. If the cost of producing a unit of output were higher than the price (AC > P), then any product would be economically unprofitable, and firms would be forced to leave this industry. If average costs were below the demand curve and, accordingly, the price (AC< Р), это означало бы, что кривая средних издержек пересекала кривую спроса и образовался некий объем производства, приносящий сверхприбыль. Приток новых фирм рано или поздно свел бы эту прибыль на нет. Таким образом, кривые только касаются друг друга, что и создает ситуацию длительного равновесия: ни прибыли, ни убытков.

There are three periods of supply elasticity: short-term, medium-term and long-term. In the short term, the firm is unable to change the volume of output and is forced to adapt to demand, changing only the price. In the medium term, an enterprise can increase production volume using immediate reserves, existing stocks and intensification of labor. In the long term, it is possible to restructure production and replace old equipment with new technically advanced capacities. In the long run, the elasticity of supply reaches its maximum value; in the short run, it is completely inelastic.

MINISTRY OF EDUCATION AND SCIENCE OF THE RUSSIAN

FEDERATION

MOSCOW STATE UNIVERSITY

ECONOMICS, STATISTICS AND INFORMATION SCIENCE

Institute of World Economy and Finance

Course work

By subject :

"Microeconomics"

"Perfect Competition"

Completed by: student ZMM-11

Skorik V.O.

Scientific adviser:

Khasanov R.Kh.

Coursework due date:

Date of course work defense:

Astrakhan 2010

Introduction…………………………………………………… 3-4 pp.

1. Perfect competition

1.1Basic concepts of perfect competition……… 5-6pp.

1.2 The mechanism of supply and demand under conditions of perfect competition………………………………………………………...... 7-9 pp.

1.3 Equilibrium of a firm and an industry in a perfectly competitive market in the short run……………………………………………………… 10-12 pp.

1.4 Equilibrium of a firm and an industry in a perfectly competitive market.................................................... ............................................... 13-17 pages .

2. Conditions of perfect competition in Russia and the behavior of a company in a perfectly competitive market

2.1 World experience and the existence in Russia of conditions for perfect competition………………………………………………………………. 18-19 pp.

2.2 Studying the behavior of firms in conditions of perfect competition………………………………………………………. 20-23 pp.

Conclusion……………………………………………………. 24-25 pp.

List of used literature…………………………... 26 pages.

Introduction

The key concept that expresses the essence of market relations is the concept of competition (lat. concurrerre to collide, compete).
Competition is rivalry between participants in a market economy for the best conditions for the 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 is the law of the market. Competition (as well as its opposite - monopoly) can only exist under a certain market condition. Different types of competition (and monopolies) depend on certain indicators of market conditions.

The main indicators are:

· Number of firms (economic, industrial, trading enterprises with legal entity rights) supplying goods to the market;

· Freedom for an enterprise to enter and exit the market;

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

· Participation of firms in control over market prices.

Historical experience shows that the market functions best in a competitive environment, when freely changing, flexible prices carry the most reliable information.

It is advisable to begin studying the work of the market, the situation in the market of consumers and producers from conditions that are not distorted by monopolism, free or pure competition, i.e. from the model of perfect competition.

The perfectly competitive market model serves as a benchmark for the efficiency of resource allocation and use. Perfect competition presupposes a level of economic organization at which society extracts maximum utility from available resources and technologies, and it is no longer possible to increase one’s share in obtaining the result without reducing another. Society is on the edge of usefulness of opportunity. Resources are allocated efficiently in both production and consumption. Firms participating in production produce a set of products that are most preferable and useful for the consumer, and production is carried out in such a way that costs for society become minimal.

Based on the above, the topic “Production and pricing in conditions of perfect competition” considered in this work is relevant.

The purpose of this work is to study pricing and production under conditions of perfect competition.
Job objectives:
1) Study the general characteristics of a perfectly competitive market.
2) Conduct an analysis of production and pricing under conditions of perfect competition.

1. Perfect competition

1.1 Basic concepts of perfect competition

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 form it through their input of supply and demand. In other words, this is a type of market structure where the market behavior of sellers and buyers is to adapt to the equilibrium state of market conditions.

Conditions 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)

The model of perfect competition is based on a number of assumptions about the organization of the market.

Product homogeneity means that all units are exactly the same in the minds of buyers and they have no way to recognize who exactly produced a particular unit. The products of different enterprises are completely interchangeable and their indifference curve has a straight shape for each buyer

The totality of all enterprises producing a homogeneous product forms an industry. An example of a homogeneous product would be the common stock of a particular corporation traded on a secondary stock market. Each of them is completely identical to any other, and the buyer does not care who exactly is selling this or that share if its price does not differ from the market one. The stock market, in which the shares of many corporations are traded, can be considered as a collection of many markets for such homogeneous goods. Standardized goods, usually sold on specialized commodity exchanges, are also homogeneous. These are, as a rule, various types of raw materials (cotton, coffee, wheat, certain types of oil) or semi-finished products (steel, gold, aluminum ingots, etc.).

Products are not homogeneous, although they are the same, the manufacturers (or suppliers) of which can be easily recognized by buyers by production or trade mark (aspirin, acetylsalicylic acid, york pain reliever), brand name or other characteristic features, if buyers give them, of course, significant value. Thus, the anonymity of sellers, together with the anonymity of buyers, makes a perfectly competitive market completely impersonal.

1.2 The mechanism of supply and demand under conditions of perfect competition

Market relations are always represented by the paired “seller-buyer” relationship. These relationships take the form of relationships between production and consumption. In the sphere of exchange, they manifest themselves as supply and demand.

Demand is the quantity of goods (services) that buyers can purchase on the market. The size of demand depends on many factors: prices of goods; prices of substitute goods; cash income of buyers; tastes and preferences of people; consumer expectations. Among these factors, the most significant are the prices of goods and the income of buyers. In this case, the determining factor is the price of the product.

Q D = f(P) – price demand function.

This function can be depicted as a graph (Fig. 1).

The indicated points on the demand curve DD show a specific combination of price and quantity of goods. This relationship is called the law of demand, which states that, other things being equal, when prices fall, the buyer purchases a larger volume of goods and reduces purchases when prices rise.

Demand factors influence the behavior of the DD demand curve in different ways. When price changes, demand either increases or decreases, moving along the DD curve. The influence of other factors on demand leads to a shift in the curve. Thus, a decrease in income of the population leads to a decrease in demand, as a result, the DD curve moves down to position D 1 D 1, and an increase in income leads to an increase in demand, and the DD curve moves up to position D 2 D 2 (Fig. 2).

Offer– this is the number of goods (services) that sellers can offer on the market. The size of the offer depends on the following factors: prices of goods; prices for substitute goods; availability of production resources; systems of taxes and subsidies for producers; number of sellers. In this case, the determining factor is the prices of the goods offered (Fig. 3).

Q S = f(P) – price supply function.

The indicated points on the supply curve SS show a specific combination of price and quantity of goods. This relationship is called the law of supply, which states: if other conditions remain unchanged, then when prices for a product rise, the seller increases production and supply of goods and reduces production and supply when they fall. Other factors change supply, which is characterized by a shift in the SS supply curve. Thus, when tax rates on producers increase, the supply of goods decreases, and the supply curve SS shifts to the left - to position S1S1. Providing subsidies leads to an increase in production and supply, and the SS curve shifts to the right - to the S2S2 position.

If demand is expressed through the quantity of goods offered for sale and through their price, we will obtain a demand curve that reflects a strictly defined relationship: the lower the price, the higher the demand. Market demand represents the total demand of all buyers of a given product at a given price (Fig. 4).