The shoe industry is one of perfect competition. What is competition: types and types, functions, significance for the economy and society as a whole. Perfect competition. Examples of perfect competition

The perfect competition market model is based on four basic conditions (Fig. 1.1). Let's consider them sequentially.

Rice. 1.1. Conditions for perfect competition

1.product homogeneity. This means that the products of firms in the view of buyers are homogeneous and indistinguishable, i.e. these products of different enterprises are completely interchangeable (they are complete substitute goods). More strictly, the concept of product homogeneity can be expressed in terms of the cross-price elasticity of demand for these goods. For any pair of manufacturing enterprises, it should be close to infinity. The economic meaning of this provision is as follows: goods are so similar to each other that even a small price increase by one manufacturer leads to a complete switch in demand for the products of other enterprises.

Under these conditions, no buyer will be willing to pay any particular firm more than he would pay its competitive firms. After all, the goods are the same, customers do not care which company they buy from, and they, of course, opt for cheaper ones. The condition of product homogeneity means, in fact, that the difference in prices is the only reason why a buyer can choose one seller over another.

2. Under perfect competition, neither sellers nor buyers affect the market situation due to the small size of the firm, the multiplicity of market participants. Sometimes both of these features of perfect competition are combined, speaking of the atomistic structure of the market. This means that there are a large number of small sellers and buyers operating in the market, just as any drop of water is made up of a gigantic number of tiny atoms.

At the same time, purchases made by the consumer (or sales by the seller) are so small compared to the total volume of the market, but the decision to lower or increase their volumes does not create either surpluses or shortages of goods. The aggregate size of supply and demand simply "does not notice" such small changes.

All these limitations (homogeneity of products, large number and small size of enterprises) actually predetermine that, under perfect competition, market entities are not able to influence prices. Therefore, it is often said that under perfect competition, each individual firm-seller "takes the price", or is a price-taker.

3. An important condition for perfect competition is no barriers to entering and exiting the market. When there are such barriers, sellers (or buyers) begin to behave like a single corporation, even if there are many of them and they are all small firms.

On the contrary, the absence of barriers typical of perfect competition or the freedom to enter and leave the market (industry) means that resources are completely mobile and move without problems from one activity to another. There are no difficulties with the termination of operations in the market. Conditions do not force anyone to stay in the industry if it does not suit their interests. In other words, the absence of barriers means the absolute flexibility and adaptability of a perfectly competitive market.

4. Information about prices, technology and likely profits is freely available to everyone. Firms have the ability to quickly and rationally respond to changing market conditions by moving the resources used. There are no trade secrets, unpredictable developments, unexpected actions of competitors. Decisions are made by the firm in conditions of complete certainty in relation to the market situation or, what is the same, in the presence of perfect information about the market.

In reality, perfect competition is quite rare and only a few of the markets come close to it (for example, the market for grain, securities, foreign currencies). For us, not only the area of practical application of our knowledge (in these markets) is of significant importance, but also the fact that perfect competition is the simplest situation and provides an initial, reference model for comparing and evaluating the effectiveness of real economic processes.

What should the demand curve for the product of a perfectly competitive firm look like? Let us take into account, firstly, that the firm takes the market price, which serves as a given value for the corresponding calculations. Secondly, the firm enters the market with a very small part of the total amount of goods produced and sold by the industry. Consequently, the volume of its production will not affect the market situation in any way, and this given price level will not change with an increase or decrease in the output of this firm.

Obviously, under such conditions, the demand for the company's products will graphically look like a horizontal line (Fig. 1.2). Whether the firm produces 10 units of output, 20 or 1, the market will absorb them at the same price R.

From an economic point of view, the price line, parallel to the x-axis, means the absolute elasticity of demand. In the case of an infinitesimal price reduction, the firm could expand its sales indefinitely. With an infinitesimal increase in the price, the sale of the enterprise would be reduced to zero.

Rice. 1.2. Demand and total income curves for an individual firm under the conditions

perfect competition

The presence of perfectly elastic demand for the firm's product is considered to be a criterion for perfect competition. As soon as this situation develops in the market, the firm begins to behave like (or almost like) a perfect competitor. Indeed, the fulfillment of the criterion of perfect competition sets many conditions for the company to operate in the market, in particular, determines the patterns of income.

A competitive firm can occupy a variety of positions in an industry. It depends on what its costs are in relation to the market price of the good that the firm produces. In economic theory, three most common cases of the ratio of the average costs of a firm are considered AC and market price R, determining the state of the firm (obtaining excess profits, normal profits or the presence of losses), which is shown in Fig. 1.3.

In the first case (Fig. 1.3, a) we observe an unsuccessful, inefficient firm: its costs are too high compared to the price of the goods on the market, and they do not pay off. Such a firm should either modernize production and reduce costs, or leave the industry.

In case 1.3, b, the firm with the volume of production Q E reaches equality between average cost and price (AC = P), which characterizes the equilibrium of the firm in the industry. After all, the average cost function of the firm can be considered as a function of supply, and demand is a function of price. R. This is how equality between supply and demand is achieved, i.e. equilibrium. Volume of production Q E in this case is balanced. While in equilibrium, the firm earns only accounting profit, and economic profit (i.e. excess profit) is equal to zero. The presence of accounting profit provides the firm with a favorable position in the industry.

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

The position of the firm receiving excess profits in the industry is shown in fig. 1.3, c. With a production volume between Q1 before Q2 the firm has an excess profit: income received from the sale of products at a price R, exceeds the firm's costs (AC< Р). It should be noted that the maximum amount of profit is achieved in the production of products in the volume Q2 The size of profit is shown on fig. 1.3, in the shaded area.

However, it is possible to determine more precisely the moment when the increase in production should be stopped so that profits do not turn into losses, as, for example, with output at the level Q3. To do this, it is necessary to compare the marginal costs of the firm MS with the market price, which for a competitive firm is also the marginal revenue MR. Recall that the income (revenue) of the firm is called payments received in its favor when selling products. Like many other indicators, economics calculates income in three varieties. Total Revenue (TR) name the total amount of revenue that the company receives. Average income (AR) reflects revenue per unit of product sold, or, equivalently, total revenue divided by the number of products sold. Finally, marginal revenue (MR) represents the additional income generated from the sale of the last unit sold.

A direct consequence of the fulfillment of the criterion of perfect competition is that the average income for any volume of output is equal to the same value, namely, the price of the goods. The marginal revenue is always at the same level. So, if the price of a loaf of bread established in the market is 23 rubles, then the bread stall acting as a perfect competitor accepts it regardless of the volume of sales (the criterion of perfect competition is fulfilled). Both 100 and 1000 loaves will be sold at the same price per piece. Under these conditions, each additional loaf sold will bring the stall 23 rubles. (marginal income). And the same amount of revenue will be on average for each loaf sold (average income). Thus, equality is established between average income, marginal income and price (AR=MR=P). Therefore, the demand curve for the products of an individual enterprise in conditions of perfect competition is simultaneously the curve of its average and marginal prices.

As for the total income (total revenue) of the enterprise, it changes in proportion to the change in output and in the same direction. That is, there is a direct, linear relationship:

If the stall in our example sold 100 loaves of 23 rubles, then its revenue, of course, will be 2300 rubles.

Rice. 1.3. The position of a competitive firm in the industry:

a - the company suffers losses;

b - obtaining a normal profit;

c - making super profits

Graphically, the curve of total (gross) income is a ray drawn through the origin with a slope:

tg=∆TR/∆Q=MR=P

That is, the slope of the gross income curve is equal to marginal revenue, which in turn is equal to the market price of the product sold by the competitive firm. From this, in particular, it follows that the higher the price, the steeper the straight line of gross income will go up.

Marginal cost reflects individual production cost each subsequent unit of goods and change faster than average costs. Therefore, the firm achieves equality MS = MR, at which profit is maximized, much earlier than average cost equals the price of the good. At the condition that marginal cost is equal to marginal revenue (MC = MR) is production optimization rule. Compliance with this rule helps the company not only maximize profit, but also minimize losses.

So, a rationally operating firm, regardless of its position in the industry (whether it suffers losses, whether it receives normal profits or excess profits), must produce only optimal production volume. This means that the entrepreneur must strive for such a volume of output at which the cost of producing the last unit of goods MS will be the same as the proceeds from the sale of that last unit MR. In other words, the optimal output is reached when the marginal cost equals the firm's marginal revenue: MS = MR. Consider this situation in Fig. 1.4, a.

Rice. 1.4. Analysis of the position of a competitive firm in the industry:

a - finding the optimal volume of output;

b - determining the profit (or loss) of a firm - a perfect competitor

In figure 1.4, but we see that for a given firm, the equality MS=MR achieved by the production and sale of the 10th unit of output. Therefore, 10 units of goods is the optimal volume of production, since this volume of output allows you to maximize profits, i.e. get all the profits in full. By producing fewer products, say five units, the firm's profit would be incomplete and we would only get a portion of the shaded figure representing profit.

It is necessary to distinguish between the profit received from the production and sale of one unit of output (for example, the fourth or fifth), and the total, total profit. When we talk about profit maximization, we are talking about getting the entire profit, i.e. total profit. Therefore, despite the fact that the maximum positive difference between MR and MS gives the production of only the fifth unit of output (see Fig. 1.4, a), we will not stop at this quantity and will continue to release. We are fully interested in all products, in the production of which MS< МR, which brings profit before MS alignment and MR. After all, the market price pays for the production costs of the seventh, and even the ninth unit of output, additionally bringing, albeit small, but still profit. So why give it up? It is necessary to refuse from losses, which in our example arise during the production of the 11th unit of output. Now the balance between marginal revenue and marginal cost is reversed: MS > MR. That is why, in order to get all the profit in full (to maximize profit), it is necessary to stop at the 10th unit of production, at which MS=MR. In this case, the possibilities for further increase in profits have been exhausted, as evidenced by this equality.

The rule of equality of marginal costs to marginal revenue considered by us underlies the principle of production optimization, which is used to determine optimal, the most profitable volume of production at any price emerging on the market.

Now we have to find out what the firm's position in the industry at optimal output: whether the firm will incur losses or make a profit. For this, let us turn to Fig. 1.4, b, where the company is shown in full: to the function MS added a graph of the average cost function AS.

Let's pay attention to what indicators are plotted on the coordinate axes. Not only the market price is plotted on the y-axis (vertically) R, equal to the marginal revenue under perfect competition, but also all types of costs (AC and MS) in terms of money. The abscissa (horizontally) always plots only the volume of output Q. To determine the amount of profit (or loss), we must perform several actions.

Step one: using the optimization rule, we determine the optimal output volume Qopt, in the production of the last unit of which equality is achieved MS = MR. On the graph, this is marked by the intersection point of functions MS and MR. From this point, we lower the perpendicular (dashed line) down to the x-axis, where we find the desired optimal output volume. For the firm in Figure 1.4, b, the equality between MS and MR achieved by the production of the 10th unit of output. Therefore, the optimal output is 10 units.

Recall that under perfect competition, a firm's marginal revenue is the same as its market price. There are many small firms in the industry and none of them individually can influence the market price, being a price taker. Therefore, for any volume of output, the firm sells each subsequent unit of output at the same price. Accordingly, the price functions R and marginal income MR match (MR = P), which saves us from looking for the optimal output price: it will always be equal to the marginal revenue from the last unit of goods.

Step two: determine the average cost AC in the production of goods in the volume Q opt . To do this, from the point Q opt , equal to 10 units, we draw a perpendicular up to the intersection with the function AU, putting a point on this curve. From the obtained point, we draw a perpendicular to the left to the y-axis, on which the amount of costs in monetary terms is plotted. Now we know what the average cost is AC optimum production volume.

Step three: determine the profit (or loss) of the firm. We have already found out what the average costs are AC for Q opt . Now it remains to compare them with the market price R, prevailing in the industry.

Remaining on the y-axis, we see that the level marked on it AC< Р. Therefore, the firm makes a profit. To determine the size of the total profit, multiply the difference between the price and the average cost (R-AS), component of profit from one unit of production, for the entire volume of the entire output Q opt:

Firm profit = (R - AC)*Qopt

Of course, we are talking about profit, provided that P > AC. If it turned out that R< АС, then we would talk about the losses of the company, the size of which is calculated according to the same formula.

In figure 1.4, b, the profit is shown as a shaded rectangle. Note that in this case, the company received not accounting, but economic or excess profits that exceed the costs of lost opportunities.

There is also another way to determine profit(or loss) of the firm. Recall what can be calculated if we know the sales volume of Qopt and the market price R? Of course, the magnitude total income:

TR = P* Qopt

Knowing the magnitude AC and output, we can calculate the value total costs:

TS = AC*Qopt

Now it is very easy to determine the value using simple subtraction profit or loss firms:

Profit (or loss) of the firm = TR - TC.

When (TR - TS) > 0 the firm is making a profit, but if (TR - TS)< 0 the firm incurs losses.

So, at the optimal output, when MS = MR, A competitive firm can make economic profits (surplus profits) or suffer losses. Why is it necessary to determine the optimal volume of output in case of losses? The fact is that if the firm produces according to the rule MS = MR, then at any (favorable or unfavorable) price that develops in the industry, it still wins.

Benefit from optimization is that if the equilibrium price in an industry is above the average cost of a perfect competitor, then the firm maximizes profit. If the equilibrium price in the market falls below average cost, then MS = MR firm minimizes losses otherwise they could be much larger.

What happens in the industry with the company in the long run? If the equilibrium price prevailing in the industry market is higher than the average cost, then firms receive excess profits, which stimulates the emergence of new firms in a profitable industry. The influx of new firms expands the industry offer. We remember that an increase in the supply of goods on the market leads to a decrease in price. Falling prices “eat up” the excess profits of firms.

Continuing to decline, the market price gradually falls below the average costs of firms in the industry. Losses appear, which “expels” unprofitable firms from the industry. Note: those firms that are not able to implement cost-cutting measures leave the industry, those. inefficient companies. Thus, the excess supply in the industry is reduced, while the price in the market begins to rise again, and the profits of companies that are able to restructure production grow.

So in the long run industry supply is changing. This happens due to an increase or decrease in the number of market participants. Prices move up and down, each time passing through a level at which they are equal to the average cost: R = AC. In this situation, firms do not incur losses, but do not receive excess profits. Such long term situation called equilibrium.

Under conditions of equilibrium, when the demand price coincides with the average cost, the firm produces products according to the optimization rule at the level MR = MS, those. produces the optimal amount of goods. In the long run, equilibrium is characterized by the fact that all the parameters of the firm coincide: AC = P = MR = MS. Since a perfect competitor always P=MR, then equilibrium condition for a competitive firm in the industry is equality AC = P = MS.

The position of a perfect competitor upon reaching equilibrium in the industry is shown in Fig. 1.5.

Rice. 1.5. The equilibrium of a firm that is a perfect competitor

In Figure 1.5, the price function (market demand) for the firm's products passes through the intersection point of the functions AC and MS. Since, under perfect competition, the firm's marginal revenue function MR coincides with the demand (or price) function, then the optimal production volume Q opt corresponds to the equality AC \u003d P \u003d MR \u003d MS, which characterizes the position of the firm in the conditions equilibrium(at point E). We see that in the conditions of long-run equilibrium, the firm does not receive any economic profit or loss.

However, what happens to the firm itself in the long run? Long term LR(from English Long-run period) fixed costs of the firm FС increase with the expansion of its production potential. In this case, changing the scale of the firm using appropriate technologies produces economies of scale. The essence of this scale effect that in the long run the average cost LRAC, having decreased after the introduction of resource-saving technologies, they cease to change and, as output grows, remain at a minimum level. Once economies of scale have been exhausted, average costs begin to rise again.

The behavior of average costs in the long run is shown in Fig. 1.6, where economies of scale are observed with an increase in production from Qa to Qb. Over the long run, the firm changes its scale in search of the best output and lowest costs. In accordance with the change in the size of the firm (volume of production capacity), its short-term costs change AS. Various options for the scale of the firm, shown in Fig. 1.6 in the form of short-term AU, give an idea of how the firm's output may change in the long run LR. The sum of their minimum values is the long-term average costs of the company - LRAC.

Rice. 1.6. Average cost of the firm in the long run - LRAC

What is the best size for a firm? Obviously, one at which the short-run average cost reaches the minimum level of the long-run average cost LRAC. After all, as a result of long-term changes in the industry, the market price is set at the level of the LRAC minimum. This is how the firm achieves long-run equilibrium. In conditions balance in the long run the minimum levels of short-term and long-term average costs of the firm are equal not only to each other, but also to the price prevailing in the market. The position of the firm in a state of long-term equilibrium is shown in Fig. 1.7.

The main features of the market structure of perfect competition in the most general form have been described above. Let's take a closer look at these characteristics.

1. The presence on the market of a significant number of sellers and buyers of this good. This means that no seller or buyer in such a market is able to influence the market equilibrium, which indicates that none of them has market power. The subjects of the market here are completely subordinated to the market element.

2. Trade is carried out in a standardized product (for example, wheat, corn). This means that the product sold in the industry by different firms is so homogeneous that consumers have no reason to prefer the products of one firm to those of another manufacturer.

3. The inability for one firm to influence the market price, since there are many firms in the industry, and they produce a standardized product. In conditions of perfect competition, each individual seller is forced to accept the price dictated by the market.

4. Lack of non-price competition, which is associated with the homogeneous nature of the products sold.

5. Buyers are well informed about prices; if one of the producers raises the price of their products, they will lose buyers.

6. Sellers are not able to collude on prices, due to the large number of firms in this market.

7. Free entry and exit from the industry, i.e., there are no entry barriers blocking entry into this market. In a perfectly competitive market, there is no difficulty in starting a new firm, and there is no problem if an individual firm decides to leave the industry (since firms are small, there is always an opportunity to sell a business).

Markets for certain types of agricultural products can be named as an example of perfect competition markets.

Note. In practice, no existing market is likely to meet all the criteria for perfect competition listed here. Even markets very similar to Perfect Competition can only partially meet these requirements. In other words, perfect competition refers to ideal market structures that are extremely rare in reality. Nevertheless, it makes sense to study the theoretical concept of perfect competition for the following reasons. This concept allows us to judge the principles of functioning of small firms that exist in conditions close to perfect competition. This concept, based on generalizations and simplification of analysis, allows us to understand the logic of the behavior of firms.

Examples of perfect competition (of course, with some reservations) can be found in Russian practice. Small market traders, tailor shops, photographic shops, car repair shops, construction crews, apartment remodelers, peasants at food markets, retail stalls can be regarded as the smallest firms. All of them are united by the approximate similarity of the products offered, the insignificant scale of the business in terms of market size, the large number of competitors, the need to accept the prevailing price, that is, many conditions for perfect competition. In the sphere of small business in Russia, a situation very close to perfect competition is reproduced quite often.

The main feature of the perfect competition market is the lack of price control by an individual producer, i.e., each firm is forced to focus on the price set as a result of the interaction of market demand and market supply. This means that the output of each firm is so small compared to the output of the entire industry that changes in the quantity sold by an individual firm do not affect the price of the good. In other words, a competitive firm will sell its product at a price already existing in the market. As a consequence of this situation, the demand curve for the product of an individual firm will be a line parallel to the x-axis (perfectly elastic demand). Graphically, this is shown in the figure.

Since an individual producer is unable to influence the market price, he is forced to sell his products at the price set by the market, i.e., at P 0 .

A perfectly elastic demand for a competitive seller's product does not mean that a firm can increase output indefinitely at the same price. The price will be constant insofar as the usual changes in the output of an individual firm are negligible compared with the output of the entire industry.

For further analysis, it is necessary to find out what will be the dynamics of the gross and marginal income (TR and MR) of a competitive firm depending on the volume of production (Q), if the firm sells any volume of manufactured products at a single price, i.e. P x = const . In this case, the TR (TR = PQ) graph will be represented by a straight line, the slope of which depends on the price of the products sold (P X): the higher the price, the steeper the graph will have. In addition, a competitive firm will face a graph of marginal revenue that is parallel to the x-axis and coincides with the demand curve for its products, since for any value of Q x, the value of marginal revenue (MR) will be equal to the price of the product (P x). In other words, a competitive firm has MR = P x. This identity takes place only under conditions of perfect competition.

The marginal revenue curve of a perfectly competitive firm is parallel to the x-axis and coincides with the demand curve for its product.

It is characterized by a balance of supply and demand. Thanks to this, the market is regulated independently and the seller or buyer cannot influence most of the processes, in particular pricing.

With this model, competition between sellers reaches its peak. Due to the fact that market participants practically do not influence the terms of sales, the economy is resistant to the occurrence of negative processes, such as unemployment, inflation.

Perfect competition has the following characteristics:

a large number of buyers and sellers, including representatives of small and medium-sized businesses;
sellers and manufacturers offer homogeneous goods;
easy entry to the market even for small companies, the absence of barriers from the state;
high awareness of all market participants about the state of affairs on it, processes, subjects, etc., information can be obtained by everyone without problems and restrictions;
sellers and buyers cannot influence the terms of trade, they take them for granted;
high mobility of resources.

If a model does not have at least one of these characteristics, it is not perfect competition. Any market strives for this structure. The main task of the state in this process is the creation of appropriate conditions through the formation of a regulatory framework.

Benefits of Perfect Competition

The desire for perfect competition makes it possible to achieve high efficiency of a market economy. Despite the fact that many people call such a model ideal, it has both undeniable advantages and some disadvantages.

Benefits of perfect competition:

self-regulation of the market;
no commodity shortage;
efficient allocation of resources;
high production efficiency;
no overpricing;
equality of opportunity for market participants;
freedom to develop entrepreneurship;
the state does not interfere in market processes;
both buyers and sellers benefit here.

Disadvantages of perfect competition

Despite the large number of advantages, pure competition has certain disadvantages:

the market system is unstable;
the risk of overproduction;
market participants get different results;
each market participant is focused on personal interests, ignoring public ones.

Almost all the shortcomings of this market model boil down to the fact that with equal opportunities, equal results are not achieved. This is explained by the fact that each market participant organizes production, a marketing company in its own way, allocates resources, uses innovative technologies. Therefore, success is achieved by those who competently approach the organization of the production and sales process, and also use advanced technologies to outperform competitors.

To achieve economic efficiency, it is first necessary to achieve efficiency in the production and distribution of resources. This is easy to achieve in conditions of perfect competition. Therefore, it is considered an ideal market model. But in reality, its practical implementation does not exist. Minimal costs, efficient allocation of resources, lack of shortages, self-regulation of processes - all these conditions cannot be met in the long term. Although the desire to achieve a system that is as close as possible to pure competition allows the economy to develop.

The market economy is a complex and dynamic system, with many connections between sellers, buyers and other participants in business relations. Therefore, markets, by definition, cannot be homogeneous. They differ in a number of parameters: the number and size of firms operating in the market, the degree of their influence on the price, the type of goods offered, and much more. These characteristics define types of market structures or otherwise market models. Today it is customary to distinguish four main types of market structures: pure or perfect competition, monopolistic competition, oligopoly and pure (absolute) monopoly. Let's consider them in more detail.

The concept and types of market structures

Market Structure- a combination of characteristic industry features of the organization of the market. Each type of market structure has a number of characteristics that are characteristic of it, which affect how the price level is formed, how sellers interact in the market, and so on. In addition, the types of market structures have varying degrees of competition.

Key characteristics of types of market structures:

the number of sellers in the industry;
firm sizes;
number of buyers in the industry;
type of goods;
barriers to entry into the industry;
availability of market information (price level, demand);
the ability of an individual firm to influence the market price.

The most important characteristic of the type of market structure is level of competition, that is, the ability of a single seller to influence the general market situation. The more competitive the market, the lower this possibility. Competition itself can be both price (change in price) and non-price (change in the quality of goods, design, service, advertising).

Can be distinguished 4 main types of market structures or market models, which are presented below in descending order of the level of competition:

perfect (pure) competition;
monopolistic competition;
oligopoly;
pure (absolute) monopoly.

A table with a comparative analysis of the main types of market structures is shown below.

Table of the main types of market structures

Perfect (pure, free) competition

perfect competition market (English "perfect competition") - characterized by the presence of many sellers offering a homogeneous product, with free pricing.

That is, there are many firms on the market offering homogeneous products, and each selling firm, by itself, cannot influence the market price of this product.

In practice, and even on the scale of the entire national economy, perfect competition is extremely rare. In the 19th century it was typical for developed countries, but in our time, only agricultural markets, stock exchanges or the international currency market (Forex) can be attributed to markets of perfect competition (and even then with a reservation). In such markets, a fairly homogeneous product (currency, stocks, bonds, grain) is sold and bought, and there are a lot of sellers.

Features or conditions of perfect competition:

number of sellers in the industry: large;
size of firms-sellers: small;
goods: homogeneous, standard;
price control: none;
barriers to entry into the industry: practically absent;
competitive methods: only non-price competition.

Monopolistic competition

Monopolistic competition market (English "monopolistic competition") - characterized by a large number of sellers offering a diverse (differentiated) product.

In conditions of monopolistic competition, entry to the market is fairly free, there are barriers, but they are relatively easy to overcome. For example, in order to enter the market, a firm may need to obtain a special license, patent, etc. The control of firms-sellers over firms is limited. The demand for goods is highly elastic.

An example of monopolistic competition is the cosmetics market. For example, if consumers prefer Avon cosmetics, they are willing to pay more for it than for similar cosmetics from other companies. But if the price difference is too big, consumers will still switch to cheaper counterparts, such as Oriflame.

Monopolistic competition includes the food and light industry markets, the market for medicines, clothing, footwear, and perfumery. Products in such markets are differentiated - the same product (for example, a multi-cooker) from different sellers (manufacturers) can have many differences. Differences can manifest themselves not only in quality (reliability, design, number of functions, etc.), but also in service: the availability of warranty repairs, free shipping, technical support, payment by installments.

Features or features of monopolistic competition:

number of sellers in the industry: large;
size of firms: small or medium;
number of buyers: large;
product: differentiated;
price control: limited;
access to market information: free;
barriers to entry into the industry: low;
competitive methods: mainly non-price competition, and limited price.

Oligopoly

oligopoly market (English "oligopoly") - characterized by the presence on the market of a small number of large sellers, whose goods can be both homogeneous and differentiated.

Entry into the oligopolistic market is difficult, entry barriers are very high. The control of individual companies over prices is limited. Examples of an oligopoly are the automotive market, the markets for cellular communications, household appliances, and metals.

The peculiarity of an oligopoly is that the decisions of companies about the prices of a product and the volume of its supply are interdependent. The situation on the market strongly depends on how companies react when the price of products is changed by one of the market participants. Possible two kinds of reactions: 1) follow reaction- other oligopolists agree with the new price and set prices for their goods at the same level (follow the initiator of the price change); 2) reaction of ignoring- other oligopolists ignore price changes by the initiating firm and maintain the same price level for their products. Thus, an oligopoly market is characterized by a broken demand curve.

Features or oligopoly conditions:

number of sellers in the industry: small;
size of firms: large;
number of buyers: large;
goods: homogeneous or differentiated;
price control: significant;
access to market information: difficult;
barriers to entry into the industry: high;
competitive methods: non-price competition, very limited price competition.

Pure (absolute) monopoly

Pure monopoly market (English "monopoly") - characterized by the presence on the market of a single seller of a unique (having no close substitutes) product.

Absolute or pure monopoly is the exact opposite of perfect competition. A monopoly is a one-seller market. There is no competition. The monopolist has full market power: it sets and controls prices, decides how much goods to offer to the market. In a monopoly, the industry is essentially represented by just one firm. Barriers to market entry (both artificial and natural) are virtually insurmountable.

The legislation of many countries (including Russia) fights against monopolistic activity and unfair competition (collusion between firms in setting prices).

Pure monopoly, especially on a national scale, is a very, very rare phenomenon. Examples are small settlements (villages, towns, small towns), where there is only one shop, one owner of public transport, one railway, one airport. Or a natural monopoly.

Special varieties or types of monopoly:

natural monopoly- a product in an industry can be produced by one firm at a lower cost than if many firms were engaged in its production (example: public utilities);
monopsony- there is only one buyer in the market (monopoly on the demand side);
bilateral monopoly- one seller, one buyer;
duopoly– there are two independent sellers in the industry (such a market model was first proposed by A.O. Kurno).

Features or monopoly conditions:

number of sellers in the industry: one (or two, if we are talking about a duopoly);
company size: various (usually large);
number of buyers: different (there can be both a multitude and a single buyer in the case of a bilateral monopoly);
product: unique (has no substitutes);
price control: full;
access to market information: blocked;
barriers to entry into the industry: virtually insurmountable;
competitive methods: absent as unnecessary (the only thing is that the company can work on quality to maintain the image).

Galyautdinov R.R.

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11.1 Perfect competition

We have already defined that the market is a set of rules, using which buyers and sellers can interact with each other and carry out transactions (transactions). Over the history of the development of economic relations between people, markets are constantly undergoing transformations. For example, 20 years ago there was not the abundance of electronic markets that are available to the consumer now. Consumers could not buy a book, household appliances, or shoes by simply opening an online store website and making a few clicks.

At the time when Adam Smith began to talk about the nature of markets, they were arranged something like this: most of the goods consumed in European economies were produced by a multitude of manufactories and artisans who used mainly manual labor. The firm was very limited in size, and employed only a few dozen workers at the most, and most often 3-4 workers. At the same time, there were quite a lot of such manufactories and artisans, and they were producers of fairly homogeneous goods. That variety of brands and types of goods that we are used to in the modern consumer society did not exist then.

These signs led Smith to conclude that neither consumers nor producers have bargaining power, and the price is set freely by the interaction of thousands of buyers and sellers. Observing the features of the markets in the late 18th century, Smith came to the conclusion that buyers and sellers are guided towards equilibrium by an "invisible hand". The characteristics that were inherent in the markets at that time, Smith summarized in the term "perfect competition" .

A perfectly competitive market is a market with many small buyers and sellers selling a homogeneous product under conditions where buyers and sellers have the same information about the product and each other. We have already discussed the main conclusion of Smith's "invisible hand" hypothesis - a perfectly competitive market is able to provide an efficient allocation of resources (when a product is sold at prices that exactly reflect the firm's marginal cost of producing it).

Once upon a time, most markets really looked like perfect competition, but in the late 19th and early 20th centuries, when the world became industrialized, and monopolies formed in a number of industrial sectors (coal mining, steel production, railway construction, banking), it became clear that the model of perfect competition is no longer suitable for describing the real state of affairs.

Modern market structures are far from the characteristics of perfect competition, so perfect competition is currently an ideal economic model (like an ideal gas in physics), which is unattainable in reality due to the numerous forces of friction.

The ideal model of perfect competition has the following characteristics:

Many small and independent buyers and sellers unable to influence the market price
Free entry and exit of firms, i.e. no barriers
The market sells a homogeneous product that does not have qualitative differences
Product information is open and equally available to all market participants

Under these conditions, the market is able to allocate resources and goods efficiently. The criterion for the efficiency of a competitive market is the equality of prices and marginal costs.

Why does allocative efficiency arise when prices equal marginal cost and is lost when prices do not equal marginal cost? What is market efficiency and how is it achieved?

To answer this question, it suffices to consider a simple model. Consider potato production in an economy of 100 farmers whose marginal cost of potato production is an increasing function. The 1st kilo of potatoes costs $1, the 2nd kilo of potatoes costs $2, and so on. None of the farmers has such differences in the production function that would allow him to gain a competitive advantage over the rest. In other words, none of the farmers have bargaining power. All potatoes sold by farmers can be sold at the same price, determined in the market for balances of general demand and total supply. Consider two farmers: farmer Ivan produces 10 kilograms of potatoes per day at a marginal cost of $10, and farmer Michael produces 20 kilograms at a marginal cost of $20.

If the market price is $15 per kilogram, then John has an incentive to increase potato production because each additional product and kilogram sold earns him an increase in profits, as long as his marginal cost does not exceed $15. For similar reasons, Mikhail has an incentive to reduction in production volumes.

Now let's imagine the following situation: Ivan, Mikhail, and other farmers initially produce 10 kilograms of potatoes, which they can sell for 15 rubles per kilogram. In this case, each of them has incentives to produce more potatoes, and the current situation will be attractive for the arrival of new farmers. Although each of the farmers has no influence on the market price, their joint efforts will lead to a fall in the market price to such a level until the opportunities for additional profit for each and every one are exhausted.

Thus, thanks to the competition of many players in conditions of complete information and a homogeneous product, the consumer receives the product at the lowest possible price - at a price that only breaks the marginal cost of the producer, but does not exceed them.

Now let's see how equilibrium is established in the perfectly competitive market in graphical models.

The equilibrium market price is established in the market as a result of the interaction of supply and demand. The firm accepts this market price as given. The firm knows that at this price it will be able to sell as many goods as it likes, so there is no point in lowering the price. If the firm raises the price of a product, it will not be able to sell anything at all. Under these conditions, the demand for the product of one firm becomes perfectly elastic:

The firm takes the market price as given, i.e. P = const.

Under these conditions, the firm's revenue schedule looks like a ray coming out of the origin:

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

This is easy to prove:

MR = TR Q ′ = (P * Q) Q ′

Because the P = const, P can be taken out of the sign of the derivative. As a result, it turns out

MR = (P * Q) Q ′ = P * Q Q ′ = P * 1 = P

MR is the tangent of the slope of the straight line TR.

A perfectly competitive firm, like any firm in any market structure, maximizes total profit.

A necessary (but not sufficient condition) for maximizing the firm's profit is the zero derivative of profit.

R Q ′ = (TR-TC) Q ′ = TR Q ′ - TC Q ′ = MR - MC = 0

Or MR=MC

That is MR=MC is another entry for the profit condition Q ′ = 0.

This condition is necessary but not sufficient for finding the maximum profit point.

At the point where the derivative is equal to zero, there may be a minimum of profit along with a maximum.

A sufficient condition for maximizing the firm's profit is to observe the neighborhood of the point where the derivative is equal to zero: to the left of this point, the derivative must be greater than zero, to the right of this point, the derivative must be less than zero. In this case, the derivative changes sign from plus to minus, and we get a maximum, not a minimum, of profit. If in this way we have found several local maxima, then to find the global profit maximum, you should simply compare them with each other and select the maximum profit value.

For perfect competition, the simplest case of profit maximization looks like this:

More complex cases of profit maximization will be discussed graphically in the appendix in the chapter.

11.1.2 The supply curve of a perfectly competitive firm

We realized that a necessary (but not sufficient) condition for maximizing the firm's profit is the equality P=MC.

This means that when MC is an increasing function, the firm will choose points on the MC curve to maximize profits.

But there are situations when it is beneficial for the firm to leave the industry, instead of producing at the point of maximum profit. This happens when the firm, being at the point of maximum profit, cannot cover its variable costs. In this, the firm incurs losses that exceed fixed costs.
The optimal strategy for a firm is to exit the market, because in this case it receives losses exactly equal to fixed costs.

Thus, the firm will stay at the point of maximum profit, and not leave the market when its revenue exceeds variable costs, or, equivalently, when its price exceeds average variable costs. P>AVC

Let's look at the chart below:

Of the five marked points where P=MC, the firm will remain in the market only at points 2,3,4. At points 0 and 1, the firm will choose to leave the industry.

If we consider all possible positions of the line P, we will see that the firm will choose points lying on the marginal cost curve that will be higher than AVC min.

Thus, the competitive firm's supply curve can be plotted as the portion of MC above AVC min.

This rule is applicable only for the case when the curves MC and AVC are parabolas. Consider the case where MC and AVC are straight lines. In this case, the total cost function is a quadratic function: TC = aQ 2 + bQ + FC

Then

MC = TC Q ′ = (aQ 2 + bQ + FC) Q ′ = 2aQ + b

We get the following graph for MC and AVC:

As can be seen from the graph, when Q > 0, the MC graph always lies above the AVC graph (because the straight line MC has an angle of inclination 2a, and the straight line AVC slope angle a.

11.1.3 Short-run equilibrium of a perfectly competitive firm

Recall that in the short run, the firm necessarily has both variable and fixed factors. So, the costs of the firm consist of a variable and a fixed part:

TC = VC(Q) + FC

The firm's profit is p \u003d TR - TC \u003d P * Q - AC * Q \u003d Q (P - AC)

At the point Q* The firm achieves maximum profit because it P=MC(necessary condition), and profit changes from increasing to decreasing (sufficient condition). On the graph, the profit of the firm is depicted as a shaded rectangle. The base of the rectangle is Q*, the height of the rectangle is (P-AC). The area of the rectangle is Q * (P - AC) = p

That is, in this variant of equilibrium, the firm receives economic profit and continues to operate in the market. In this case P > AC at the point of optimal release Q*.

Consider the equilibrium where the firm earns zero economic profit

In this case, the price at the optimum point is equal to the average cost.

A firm can earn even negative economic profits and still continue to operate in the industry. This happens when, at the point of optimum, the price is lower than the average, but higher than the average variable costs. The firm, even receiving economic profit, covers the variable and part of the fixed costs. If the firm leaves, then it will bear all the fixed costs, so it continues to operate in the market.

Finally, the firm exits the industry when, at optimal output, its revenue does not cover even variable costs, that is, when P< AVC

Thus, we have seen that a competitive firm can earn positive, zero, or negative profits in the short run. The firm leaves the industry only when, at the point of optimal output, its revenue does not even cover variable costs.

11.1.4 Equilibrium of a competitive firm in the long run

The difference between the long run and the short run is that all factors of production for the firm are variable, that is, there are no fixed costs. Just as in the short run, firms can freely enter and exit the market.

Let us prove that in the long run the only stable state of the market is one in which the economic profit of each firm tends to zero.

Let's consider 2 cases.

Case 1 . The market price is such that firms earn a positive economic profit.

What will happen to the industry in the long run?

Since information is open and publicly available, and there are no market barriers, the presence of positive economic profits for firms will attract new firms to the industry. Entering the market, new firms shift market supply to the right, and the equilibrium market price falls to a level at which the opportunity for positive profits has not been completely exhausted.

Case 2 . The market price is such that firms earn negative economic profits.

In this case, everything will happen in the opposite direction: since firms earn negative economic profit, some firms will leave the industry, supply will decrease, the price will rise to a level at which the economic profit of firms will not become zero.

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