Equilibrium condition for a competitive firm. Long run equilibrium of a perfectly competitive firm. Equilibrium conditions. Perfect Competition and Efficiency
The time intervals during which at least one factor of production remains constant are called short-term periods in the activity of the enterprise, and the time intervals during which all factors are variable are called long-term periods. Short term and long term means different conditions in the activities of the enterprise. Therefore, the laws of production efficiency are formulated separately for each of them. These patterns are essential for the dynamics of both the physical volumes of output and the cost characteristics of production.
Firm equilibrium in the short run
In the short term, when fixed assets do not change, but only variable factors (labor, raw materials, materials) change, it is important to compare total and marginal costs with the firm's income. As a result, conclusions are drawn about the optimal production volume, maximum profit and minimum losses. In particular, it is advisable for the firm to engage in entrepreneurial activity if the total revenue exceeds the total cost, or if the total cost exceeds the total revenue by less than the fixed cost, or, finally, when the price of the product is equal to the average variable cost. The firm will maximize profit when total revenue exceeds total cost by the maximum amount. Losses will be minimal at such a volume of production when total costs are minimally higher than total income and they are less than fixed costs. The firm incurs the minimum loss if the price is higher than the average variable cost but less than the average cost. If the price is less than the average variable cost, then it is better to stop production.
On fig. 2.1 shows three possible options for the position of the firm in the market.
Rice. 2.1 Position of a competitive firm in the market
If the price line P only touches the curve of average costs AC at the minimum point M (Fig. 2.1 a), then the firm is only able to cover its minimum average costs. Point M in this case is the point of zero profit. This does not mean that the firm does not receive any profit at all. Production costs include not only the cost of raw materials, labor, but also the percentage that the company could receive on its capital if it invested it in other industries. That is, the normal profit determined by competition in all industries with the same level of risk, or the reward factor of entrepreneurship, is integral part costs. As a rule, the factor of entrepreneurship is considered as a constant factor. In this regard, the normal profit is attributed to fixed costs.
If the average costs are lower than the price (Fig. 2.1 b), then the firm at certain production volumes (from to) receives an average profit higher than the normal profit, i.e. excess profit - quasi-rent.
If the average cost of the firm at any volume of production is higher than the market price (Fig. 2.1 c), then this firm suffers losses and goes bankrupt, as described above, it is better to stop production.
The equilibrium condition of the firm, both in the short run and in the long run, can be formulated as follows:
MS = MR. Any profit-seeking firm seeks to establish a level of production that satisfies this equilibrium condition.
Long term allows the firm to make those changes in production that cannot be done in the short term: it can introduce new production facilities and technologies, taking into account the achieved level of science and technology. Thus, in the long run, it can change not only variable factors, but also constant ones. In addition, in the long run, new firms may enter or leave the industry. Therefore, in the long run, the firm is more sensitive to price changes.
For a perfectly competitive firm to be in long-run equilibrium, the following three conditions must be met:
1) the firm should not have incentives to increase or decrease output in the presence of given dimensions manufacturing enterprise, which means that MC = MR, i.e. the condition of short-term equilibrium is the condition of long-term equilibrium;
2) each firm must be satisfied with the size of its existing enterprise (i.e., the volume of fixed costs of all types used);
3) there should be no motives inducing new firms to enter the industry or old ones to exit.
On fig. 6.6. A competitive firm is presented for which all three conditions are met.
First, the short-run marginal cost MC is equal to the price MR given the output Q E . This is the level of output that maximizes the firm's profits. Second, the size of the firm is just such that the short run average total cost of ATC is equal to the lowest possible long run average cost at the chosen level of output. This is a guarantee of the invariability of the size of the enterprise. Third, both the long-run average cost and the short-run average full cost are equal to the price at equilibrium output. This circumstance guarantees the absence of motives that encourage firms to both re-enter the market and leave it.
All three long-term equilibrium conditions can be summarized as the following equation:
P = MR = MC = min ATC
Price = Marginal Cost = Short Run Average Total Cost = Long Run Average Cost.
If at least one of the three conditions is not met, then the equilibrium may be disturbed.
The state of long-term equilibrium can exist until external conditions change.
How long can an industry be in equilibrium? In order to answer this question, it is necessary to consider three situations in which a firm in this industry may find itself in the process of functioning in the long run.
1. An industry can be in a state of equilibrium: it receives a normal profit (if marginal cost and marginal income are equal); its economic profit is zero. This explains the reluctance of other firms to enter the industry, and functioning - to leave it.
2. Under the most favorable circumstances, the firm may receive economic non-zero profit . Such profits will begin to attract other firms into this industry. Therefore, an economic non-zero profit will exist as long as the price exceeds the average cost. But the entry of new firms into the industry will lead to an increase in the supply of goods on the market and after a while the price will fall to the level of average costs. As a result, the economic non-zero profit will disappear.
3. If the firm receives negative economic profit , this would mean that the firm is not even making a normal profit. In this situation, the firm will not be able to cover its opportunity cost (which includes the normal profit) and will leave the industry in search of a more profitable investment of capital. Firms will leave the industry. However, over time, the outflow from the industry will reduce the supply of products and then the price will rise, approaching the average cost. The remaining firms and the industry will again come to a state of equilibrium.
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 necessary condition 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, which is 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 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, the 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).
- the optimal volume of output, i.e. the level of output that maximizes the firm's 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:
price is greater than average variable cost but less than 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 
, then some firms will incur losses and they will be forced to leave the industry. And this reduces the market supply and increases the price. The price continues to rise until it reaches the low level again. 
.
Thus, under perfect competition, freedom to enter and exit the market guarantees that the market will reach a long-run equilibrium in which each firm earns a normal profit at a price equal to the minimum average cost of production. Long-term equilibrium condition: .
What will happen in the long term. It is impossible to answer this question unambiguously. We can only speak of a general trend. It can be considered the desire for the company to obtain normal profits, break even, that is, setting prices at the level of average costs.
For firms operating under monopolistic competition, in the long run there is a tendency to earn normal profits, or to break even. These trends, based on the presence of the properties of "pure competitors" and "pure monopolists", determine prices and production volumes under the conditions we are considering.
Equilibrium will be established when the demand and average cost curves have only one common point - the touch point, that is, when the price is set at the level of average cost for a certain volume of production, and the company will not receive economic profit and will not incur losses. In the long run P = AC; MS = MR.
For the market of monopolistic competition, setting prices at the level of average costs is only a trend. There are factors that make it difficult to predict the outcome of monopolistic competition in the long run. These include the following circumstances:
1. There are certain barriers to entry into the industry under monopolistic competition.
2. Differentiation of a product or service may be based on circumstances that are difficult or even impossible for competitors to recreate. Therefore, the firm will receive economic profit over a long period.
Many examples can be cited, which gives reason to assess the achievement of price equality with average costs in the market of monopolistic competition only as a fairly probable result in the long run.
An industry cannot be in equilibrium as long as firms can charge more for a product than the average cost of a profit-maximizing output, that is, the price must equal the average cost of that output. In long run equilibrium, the demand curve is tangent to the long run average cost curve. The price to be set in order to sell Q1 of the good is P corresponding to the demand curve. At the same time, the average costs are also equal to P per piece, and, therefore, the profit is zero both from one piece and as a whole. Free entrance to the market prevents firms from extracting economic profits in the long run. The same process works in reverse direction. If market demand were to decline after equilibrium was reached, then firms would leave the market, as the decline in demand would make it impossible to cover economic costs. With the release of Q1 at which MR=LRMC after the demand contraction, the typical seller finds that the price P1 he must charge in order to sell that quantity of a good is less than the average cost AC1 of producing it. Since, under these circumstances, firms cannot cover their economic costs, they will exit the industry and move their resources to more profitable enterprises. When this happens, the demand curve and the marginal revenue curves of the rest of the firms will shift upward. This will be because the reduction in the availability of a commodity will increase the maximum prices and marginal revenues that are characteristic of any output and that the remaining sellers could receive. The exit of firms from the industry will continue until a new equilibrium is reached, in which the demand curve is again tangent to the LRAC curve, and firms earn zero economic profits. The process of exiting firms from the market could also occur as a result of the fact that firms would overestimate the marginal income possible from sales in the market. An excess of firms could make the commodity so plentiful that the firms in the market could not cover their average cost at a price at which marginal revenue equals marginal cost.
Consumers pay higher prices when products are differentiated than they would pay if the product were standardized and produced by competitive firms. An additional price increase occurs when there are additional costs of product differentiation. Therefore, under monopolistic competition, economic profits fall to zero before prices reach a level where only their marginal costs can be covered. At a level of output for which price equals average cost, price exceeds marginal cost. The reason for this discrepancy between average and marginal costs lies in the price controls that allow for product differentiation. (it causes the downward slope of demand, which leads to the fact that marginal revenue does not reach the value of the price at any output). In equilibrium, the firm always adjusts the price until it establishes the equality MR=MC. Since the price always exceeds the MR, then in equilibrium it will exceed the MC. As long as the product is differentiated among firms, it is impossible for the average cost of production to reach its maximum possible level in the long run. The disappearance of economic profit requires that the demand curve be tangent to the cost curve. This can only happen at output corresponding to the LRAC minimum if the demand curve is a horizontal line, as in perfect competition. Monopolistically competitive firms do not achieve all possible cost reductions in the long run. In equilibrium, the monopoly competitive firm produces Q1 output, but the LRAC minimum is reached at Q2 output, hence Q1-Q2=excess capacity. Therefore, the same output could be offered to the consumer at a lower average cost. The same quantity of goods could be produced by a smaller number of firms that would produce large quantity product at the lowest possible cost. But equilibrium under these conditions can only be achieved if the product is standardized. Therefore, product differentiation is incompatible with saving unused resources. Ceteris paribus, the higher the equilibrium price, the greater the excess capacity.
The long run allows firms to make certain technological and managerial changes that cannot be made in the short run. In the short term, there is given number firms in the industry, each of which has a permanent, unchanging equipment. Indeed, firms may close in the sense that they produce zero units in the short run, but they do not have enough time to liquidate their assets and go out of business. In contrast, in the long run, firms have sufficient time to either expand their production capacity or, more importantly, grow (or shrink) as new firms enter or existing firms leave the industry. It is necessary to investigate how these long-term adjustments change the conclusions concerning the determination of output and price in the short run. So, after the long-term adaptations are completed, i.e. long-term equilibrium is reached if the price of the product corresponds exactly to each minimum point of the firm's average total cost, and production falls at the same point. This conclusion follows from two basic facts: 1) firms seek profit and avoid losses, and 2) under competition, firms freely enter and leave the industry. If the price initially exceeds the average gross cost, then the opportunity for economic profits will attract new firms into the industry. But this expansion of the industry will increase the supply of products until the price falls again and equalizes the average gross cost.
For example, in fig. 4.10 but price equal to P 0, stimulates the firm to increase production, as it makes a profit. This circumstance attracts new firms, which will increase supply in the industry. N(curve shift S0 into position S1) from the value Qs 0 before Qs 1, causing the price to fall from P 0 before R 1. If firms incur losses, this forces them to leave the industry (Figure 4.10 b), while the quantity supplied will decrease from Qs 0 before Qs 1, and the market price will rise from P0 before R 1. Firms will leave the industry until the market reaches an equilibrium price equal to the minimum long-run average cost. LAC for companies in the industry N, i.e. until economic profit is zero.
Rice. 4.10. The firm's equilibrium in the long run under perfect competition is:
but- increase in supply in the industry; b- Decreased supply in the industry
From the above, we can formulate two conditions for the equilibrium of the firm in the long run:
1) marginal costs are equal to the market price of the goods (marginal income) - a universal rule;
2) the firm should earn zero economic profit.
However, there is a third condition: the firm must be satisfied with the size of its enterprise. This means that she makes full use of positive effect the scale of production, i.e. in both the short run and the long run, the firm chooses the lowest average total cost curve.
APPS
Comparative characteristics organizational and legal forms of entrepreneurship in the Russian Federation
| Terms | open Joint-Stock Company | Closed Joint Stock Company | Society with limited liability | Production cooperative |
| Number of participants | Minimum - 1, maximum - unlimited | Minimum - 1, maximum - 50 | Minimum - 1, maximum - 50 | Minimum - 5, maximum - unlimited |
| Minimum size authorized capital | At least 1000 times the minimum wage | At least 100 times the minimum wage | No restrictions | |
| Participation of legal entities | No restrictions | No restrictions | No restrictions | If it is provided for by the statute |
| Personal labor participation of members of the organization in production activities | Not provided | Not provided | Not provided | Either a PC member must make an additional share contribution. At the same time, the number of PC members who do not take personal labor participation in its activities cannot exceed 25% of the number of PC members who take personal labor participation in its activities. |
| Possibility of issuing shares | Mandatory | Mandatory | Not provided. The right to place bonds and other securities | Forbidden |
| Alienation by a participant of his share (shares, share) | No restrictions | The presence of a pre-property right to purchase shares sold to a third party. The charter may also provide for the company's pre-property right, if the shareholders did not use their pre-emptive right to acquire shares | The charter may provide for the consent of the participants and the company to alienate their share to other participants. The charter may establish a ban on the alienation of a share (part of a share) to third parties. Availability of a pre-emptive right to acquire a share (part of a share) sold to a third party. The charter may also provide for the company's preemptive right, if the participants did not use their preemptive right to acquire a share (part of a share) | The charter may establish a ban on the alienation of a share (part of a share) to other members. Consent of the general meeting to the alienation of a share (part of a share) to third parties. The presence of a pre-emptive right to acquire a share (part of a share) sold to a third party |
Table continuation
| Consent of other participants or governing bodies to accept third parties as participants | Not required | Not required | It may be provided for by the charter. It is necessary in case of an increase in the authorized capital on the basis of an application by a third party (applications of third parties) for its acceptance into the company and for making a contribution | Necessarily |
| Exclusion from membership | Not provided | Not provided | By court decision on the basis of a claim by participants having at least 10% of the authorized capital | By decision of the general meeting |
| Participation in management and control bodies of persons who are not participants | Permissible | Permissible | Permissible | Unacceptable |
| Decision-making by the general meeting of participants | The shareholder has the number of votes corresponding to the number of shares he owns, unless otherwise provided by the charter | The participant has the number of votes proportional to the size of his share in the authorized capital. The charter of the company may establish a different procedure for determining the number of votes of the company's participants | Each PC member has one vote | |
| Frequency of distribution of profits between participants | According to the results of the first quarter, half a year, nine months of the financial year and (or) according to the results of the financial year | Quarterly, semi-annually or annually | - | |
| The procedure for distributing profits between participants | Accrual and payment of dividends on outstanding shares | In proportion to the size of the shares of participants in the authorized capital of the company or in another manner provided for by the charter of the company | Not more than 50% of the amount of distributed profit - in proportion to share contributions, the rest - in accordance with labor participation | |
| Public disclosure of information about the activities of the company | Provided by legislation | In case of registration of the issue prospectus or public placement of bonds or other securities | In case of public placement of bonds or other securities | Provided to public authorities and local governments in the manner prescribed by the legislation of the Russian Federation |
Table continuation
| Formation of funds | Reserve fund - necessarily in the amount provided for by the charter, but not less than 5% of the authorized capital. Special Fund for corporatization of employees of the company - optional | Optional | Optional | |
| Control bodies | Audit commission (review-zor), auditor | Audit commission (auditor) | May be provided for by the charter of the company. In companies with more than 15 participants, the formation of an audit commission (election of an auditor) is mandatory | The charter of the company may provide for the formation of an audit commission or the election of an auditor if the number of members of the cooperative is less than 20 people |