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The perfect competition market model briefly. perfect competition market

5. Characteristics of the market perfect competition

Perfect (pure) competition is the rivalry of numerous producers, in which the influence of each participant is economic. process on the general situation of the market is so small that it can be neglected. In conditions of perfect competition, there are a very large number of firms producing a standardized product. The main and features of perfect competition are:

1) A very large number of independently operating sellers, usually offering their products in a highly organized market. An example is stock Exchange and market in. currencies;

2) Standardized products. Competing firms produce standardized or homogeneous products. At a given price, the consumer does not care which seller to buy the product from. In a competitive market, the products of firms B, C, D, and so on, are viewed by the consumer as exact analogues of firm A's product. Due to product standardization, there is no basis for non-price competition, that is, competition based on differences in product quality, advertising or sales promotion;

3) "Agreeing with the price." In a purely competitive market, individual firms exercise little control over the price of output. This property follows from the previous two. Under pure competition, each firm produces such a small fraction of its total output that an increase or decrease in its output will have no appreciable effect on the total supply, and therefore the price of the product. To illustrate, let's assume that there are 10,000 competing firms, each currently producing 100 units. The total volume of supply is thus 1 million units. Now suppose that one of these 10,000 firms cuts its output to 50 units. Will it affect the price? No. And the reason is clear: the reduction in output by one firm has an almost imperceptible effect on the total supply - more precisely, the total supply decreases from 1 million to 999950 units. This is obviously not a sufficient change in the volume of supply in order to noticeably affect the price of the product. A separate, competing manufacturer agrees on a price. He cannot set a new market price, but only adapts to it, that is, he agrees with the price.

In other words, the individual competing producer is at the mercy of the market; the price of a product is a given quantity, which the producer has no influence on. A firm can get the same unit price for either more or less output. Asking for a higher price than the current market price would be useless. Buyers will not buy anything from firm A at a price of 30.5 rubles if its 9999 competitors sell an identical product, or therefore an exact substitute, for 30 rubles. a piece. On the contrary, due to the fact that firm A can sell as much as it considers necessary, at 30 rubles. apiece, there is no reason for her to prescribe any more low price, for example 29.5 rubles. Indeed, if she did so, it would cause a decrease in her profits;

4) Free entry and exit from the industry. New firms are free to enter and existing firms are free to leave purely competitive industries. In particular, there are no major obstacles - legislative, technological, financial or otherwise - that could prevent the emergence of new firms and the sale of their products in competitive markets.

As a result of all this, in such a market, none of the sellers and buyers is able to exert a decisive influence on the price and scale of sales. However, such a model of competition and pricing practically does not exist in reality.

6. Characteristics of the market of imperfect competition

the best way characteristics of the market model of imperfect competition yavl. comparing the latter with the market model of perfect competition and identifying differences between them. So first let's say. words about the market of perfect competition (this is an ideal model, since it does not exist in reality). The market model of perfect competition is characterized by the following features: 1. the presence of many independent sellers and buyers on the market, each of which produces or buys only a small share of the total market volume of this product; 2. homogeneity of goods and the same perception by buyers of sellers; 3. the absence of entry barriers for entry into the industry of new manufacturers and the possibility of free exit from the industry; 4.full awareness of all market participants; 5.rational behavior of all market participants.

Now, based on the differences in the above points, we will try to outline a model of the imperfect competition market.

Speaking about the market of imperfect competition, one can delve into the analysis, for example, of oligopoly or monopolistic competition, which are yavl. real subjects of the market of imperfect competition, however, the impact, especially the analysis, of these subjects is not yavl. our task, therefore, we confine ourselves to considering the features of a pure monopoly. A monopoly can be described as a market structure in which one firm is supplier to the market of a product that does not have close substitutes. A monopoly product is unique in the sense that there are no good or close substitutes for that good. From the buyer's point of view, this means that there are no viable alternatives, leaving the buyer to either buy the product from the monopolist or do without it. In contrast to the subject of the market of perfect competition, which "agrees with the price", the monopolist dictates the price, that is, exercises significant control over the price. And the reason is obvious: it produces and therefore controls the total supply. With a descending demand curve for its product, the monopolist can cause a change in the price of the product by manipulating the quantity of the product offered. One of the most important distinguishing features of the monopoly yavl. the presence of barriers to entry into the industry, that is, restrictions that prevent the entry of additional sellers into the market of a monopoly firm. Barriers to market entry are necessary to maintain monopoly power. Among the main types of barriers to market entry that enable monopolies to emerge and help maintain them are the following:

1. Exclusive rights received from the government.

2. Patents and copyrights, which give creators of new products or works of literature, art and music exclusive rights to sell or license the use of their inventions and creations. Patents may also be granted for manufacturing technologies. Patents and copyrights provide monopoly positions for only a limited number of years. After the expiration of the patent, the barrier to entry into the market disappears.

3. Ownership of the entire supply of any production resource. An example of this is the position of De Beers in the diamond market, which has monopoly power in the diamond market due to its control over the sale of about 80% of rough diamonds suitable for jewelry making.

Any unique ability or knowledge can also create a monopoly. Talented singers, artists or athletes have a monopoly on the use of their services.

A natural monopoly is an industry in which long-run average costs reach a minimum only when one firm serves the entire market. An example of a natural monopoly can be water supply, telephone communications, mail within a particular region. It should be noted that in such industries, economies of scale are especially pronounced, and at the same time, competition is not feasible.

Summing up the assessment of the market model of imperfect competition, it should be noted with all fairness that monopoly and perfect competition yavl. two extreme forms of market structure. Real market structures lie between these two extremes.

Solution:
A perfectly competitive market has the following character traits:
- homogeneity of products,
- the number of sellers is unlimited,
- free entry and exit in the market, i.e. absolute mobility of all resources.

Towards perfect competition it is forbidden carry...

A perfectly competitive market is characterized by...

A wider choice of products for the consumer is provided by manufacturers as part of …

Solution:
The most diverse needs of people are satisfied with the help of differentiated products. Such products are sold in the markets of monopolistic competition and oligopoly.

In a perfectly competitive market, the individual producer...

Solution:
In a perfectly competitive market, there is an unlimited number of participants, therefore, the volume of production of each firm is not large and the manufacturer is able to sell all his goods at a single price. The price in the market of perfect competition is unchanged, each unit of the product is sold at the same price, because no one is able to change the price (the volume of production of each firm is small in relation to the entire market). It changes only under the influence of market forces.

In a perfectly competitive market, a firm is in a state of short run equilibrium if the following conditions are met...

Solution:
Equilibrium competitive firm in the short run is achieved under the condition , that is, when marginal revenue is equal to marginal cost, and the latter, in turn, exceed the average total cost. Therefore, a firm in a perfectly competitive market is in short-run equilibrium if:
- marginal revenue is equal to marginal cost;
Marginal cost is greater than average total cost.
The equilibrium of a competitive firm in the long run is achieved under the condition . That is, when its long-term, short-term marginal and average indicators coincide.

At the closing point of a competitive firm, the following conditions are satisfied:

Solution:
The firm will go out of business if the price is so low and will only compensate for the average variable costs. Thus, the conditions for the equilibrium of the firm will be the equality of marginal revenue, marginal cost and the minimum value of average variable costs. If the price is below the average gross cost, but above the average variable, then in the short term the company does not close, but tries to minimize losses.

Theme: Monopoly

indicators market power are…

Solution:
One measure of market power is the Lerner index, which is inversely proportional to the elasticity of demand for a good, and the Herfindahl-Hirschman index.

Examples of price discrimination include...

Solution:
Price discrimination is the sale of the same product to different consumers at different prices, and the difference in prices is not due to differences in production costs. Of the proposed options, examples of price discrimination would be:
- an action when, when buying two packs of toothpastes, they give a brush as a gift, since those who do not buy 2 toothpastes at once are in a discriminatory position, they do not have the opportunity to get a brush for free;
- selling movie tickets for a morning session is cheaper than for an evening one (separation of markets into expensive and cheap ones); the prices are different, the film is the same, there are no significant differences in the costs of showing the film at different times.

The characteristics of a monopoly are...

The conditions for maximizing profits in a monopoly include ...

Solution:
The monopolist is in equilibrium at . A monopoly firm maximizes profit if:
- equal marginal revenue and marginal cost;
-price is above marginal revenue

A perfectly competitive market is characterized by the following features:

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

This means that any arbitrarily small price increase by one producer over 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 firm. No non-price competition.

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

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

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

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

However, the perfect competition model:

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

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

Short-run equilibrium of a firm under perfect competition

Demand for a perfect competitor's product

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

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

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

Income of a firm that is a perfect competitor

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

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

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

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

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

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

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

A-priory

All income functions are shown in Fig. 2.

Rice. 2. Competitor's income

Determination of the optimal output volume

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

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

There are two interrelated methods for determining the optimum point:

1. The method of total costs - total income.

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

n=TR-TC=max

Rice. 3. Determination of the point of optimal production

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

From the analysis of the 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

dp/dQ=(p)`= 0.

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

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

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

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

2. The method of marginal cost - marginal income.

Мп=(п)`=dп/dQ,
(n)`=dTR/dQ-dTC/dQ.

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

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

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

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

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

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

It is required to determine the optimal output volume.

Solution (1 way):

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

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

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

Solution (2 way):

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

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

Solving this equation, we got the same result.

Short-term benefit condition

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

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

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

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

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

The following options are possible:

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

Positive economic profit

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

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

Negative economic profit (loss)

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

Zero economic profit

Termination Condition

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

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

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

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

P>AVC,

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

If price equals average variable cost

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

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

Production termination condition

Let us prove the validity of these arguments.

A-priory, n=TR-TS. If a firm maximizes its profit by producing the nth number of products, then this profit ( n) must be greater than or equal to the profit of the firm under the conditions of closing the enterprise ( 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, the firm minimizes its losses in the short run, continuing to operate.

Intermediate conclusions for this section:

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

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

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

Competitor's short run supply curve

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

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

Competitor's supply curve

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

Because the Ro(closing points), then the firm's supply is zero. If the market price rises to more than high level, then the equilibrium volume of production will be determined by the relation MC And MR. The very point of the supply curve ( Q;P) will lie on the marginal cost curve.

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

Example 2: Defining a sentence function

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

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

Determine the firm's supply function under perfect competition.

1. Find MS:

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

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

2+(Q-2) 2 = P or

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

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

Q=S(P) at Pmin AVC.

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

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

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

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

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

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

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

Long-run market equilibrium under perfect competition

Long term

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

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

In the long term:

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

Main assumptions of the analysis

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

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

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

The mechanism of formation of long-term equilibrium

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

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

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

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

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

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

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

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

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

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

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

Basic conditions for long-run equilibrium

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

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

Market supply in the long run

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

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

With fixed costs;
with increasing costs
with decreasing costs.

Industries with fixed costs

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

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

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

Industries with rising costs

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

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

P2=MR2=SATC2=SMC2=LATC2.

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

Industries with diminishing costs

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

This is a rather rare situation in practice. An example 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 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 foreign economy(English external economies). It is caused solely by the growth of the industry and by forces beyond the control of the individual firm. External economies should be distinguished from the already known internal economies of scale, achieved by increasing the scale of the firm and completely under its control.

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

TCi=f(qi,Q),

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

Q is the output of the entire industry.

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

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