Equilibrium condition in the long run. Equilibrium of a competitive firm in the short and long run. commodity-money proportion expressing the ratio between commodity and money supply

Since the time factor plays a significant role in the theory of the firm, it is necessary to clarify two concepts: long-term and short-term periods.

Long term- this is such a period of time during which the firm can change all factors of production.

In contrast to the long-term short term the firm has minimal freedom of maneuver. It is not even able to increase output in accordance with the increased consumer demand.

What should be the optimal volume of production if the firm sets the goal of maximizing profits?

Let us first assume that the firm operates under conditions perfect competition. This is a market in which each firm accounts for a small share of sales of this product. There is freedom of access to the market. As a result of this free access, each firm's demand curve slopes down until each firm's profits reach normal levels and there is no incentive for new competitors to enter the market. (Normal profit is the minimum profit that a firm must earn in order to prolong its life).

Under these conditions, the demand curve for each firm is horizontal. This means that a competitive firm will sell any volume of output at the same price.

In this case, the total income of the firm is TR(total revenue) = P*Q , where Q is the number of goods sold.

Average income(AR- average revenue) is the income per unit of the good sold. AR=TR\Q.

Selling each additional unit of production, the company will receive some increase in total income. This increment is called marginal income . (MR – marginal revenue).

Thus, for a firm operating in a perfectly competitive market, marginal revenue is equal to the market price, since for each unit sold, the firm will receive the market price, regardless of the volume of its output. Graphic line prices and marginal revenue coincide and are horizontal.

It is obvious that and average income equal to the limit.

Thus, competitive firms are "price takers" and can sell as much output at the prevailing market price as they can produce.

Now we will give an answer about optimal production.

With a U-shaped average cost curve AC, the only output in short term, corresponding to maximum profit, is the one at which marginal cost equals marginal revenue.

Equilibrium output Q* is achieved under the condition

The graph itself is on page 231 in Ivashkovsky's Microeconomics.

Explanation of the chart is there.

Firm equilibrium in the long run.

Here the firm can change all the resources it uses. All factors of production become variable.

In the long run, there are no fixed costs, and average variable costs equal to the average total cost. Therefore, in relation to the long-term period, only one concept is used - average costs.

Graph of average costs in the long run on page 234 in Ivashkovsky's Microeconomics. Explanations are there

Efficient production scale such sizes of production are considered when, with an increase in the volume of output, AC L decreases.

Ineffective scale- such sizes when the firm incurs losses from increase in release.

The optimal scale is the one at which the minimum cost is achieved.

Thus, under conditions of perfect competition in the long run, the firm maximizes profit if equality is satisfied.

The rule of least cost. Principles of profit maximization under conditions of perfect competition.

Least Cost Rule- the condition according to which costs are minimized when the monetary unit spent on each resource gives the same return - the same marginal product. In this case, the optimal combination of production factors is achieved.

The firm chooses the level of production at which it makes the greatest profit. If the production of an additional unit of output will lead to an increase in gross income, then the firm must increase production. Thus, the firm must be guided by the rule that it should increase production to a level where marginal revenue equals marginal cost. This rule is observed in conditions of perfect competition. A firm operating under perfect market can control only 1 parameter - the volume of output. The price of goods and resources is formed by the market. Conclusion: The resource will find application as long as the marginal productivity is not lower than the price. This means that the price of resources measures ultimate performance these factors. Productivity will be maximum on its income. All factors in monetary terms equal to their prices.

Modern economic theory states that profit maximization or cost minimization is achieved when marginal revenue equals marginal cost (MR=MC). Let's consider this condition in more detail. Let us plot the quantity of production on the abscissa axis, and the total income and costs on the ordinate axis. Total revenue is a straight line from the origin, and total cost is the sum of the fixed and variable cost curves.

By connecting both graphs, it is easy to understand the extent to which the activity of the enterprise that generates income varies. The maximum profit is made when the gap between TR and TC is the largest (segment AB). Points C, D are points of critical production volume. Then point C after point D, total costs exceed total income (TC>TR), such production is economically unprofitable and therefore inexpedient. It is in the interval of production from point K to point N that the entrepreneur makes a profit, maximizing it with an output equal to OM. Its task is to gain a foothold in the nearest neighborhood of point B. At this point, the slope coefficients of income (MR) and total costs (MC) are equal: MR=MC. Thus, the condition for profit maximization is the equality of marginal revenue to marginal cost.

In a short-run equilibrium, four types of firms can be distinguished. The firm that manages to cover only the average variable costs (AVC = P) is called the marginal firm. Such a firm manages to be “afloat” only for a short time (short term). In the event of a price increase, it will be able to cover not only current (average variable costs), but also all costs (average total costs), i.e. earn a normal profit (like a normal premarginal firm), where ATC=P.

In the event of a price reduction, it ceases to be competitive, because cannot even cover current costs and will be forced to leave the industry, being outside it. If the price is greater than the average total cost, then the firm earns excess profit along with normal profit.

Let's try to find out at what level of the pro-equilibrium of the INDUSTRY firm the maximum profit is achieved, in the short run, i.e., the difference between the total period of the lower income and total costs is maximized.
Modern economic theory states that profit maximization or cost minimization is achieved if and only if marginal revenue equals marginal cost (MR = MC). Let's consider this condition in more detail. Let's plot the quantity of production on the abscissa axis, and the total income and costs on the ordinate axis (see Fig. 6-15). The total income is

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


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

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

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


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

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

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

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

In the long run, a firm can change all factors of production, and an industry can change the number of its firms. The firm seeks to expand production by lowering average costs.

As productivity increases, average total cost decreases. With decreasing productivity, they increase. If there is a positive scale effect, then the long-run average cost curve has a significant negative slope; if there is constant returns to scale, then it is horizontal; in the case of a negative scale effect, the curve tends to rise.

The growth of production in the long run, the entry of new firms into the industry may affect the prices of resources. If the industry uses non-specific resources, then the price of the resource may not rise. In this case, the costs remain unchanged.

However, in most industries, additional demand for a resource causes an increase in its price. There are industries with declining costs in the long run. Such a decline is usually associated with an increase in the scale of production, due to which the demand for resources is relatively reduced. In this case, the price of the resource decreases.

Under conditions of perfect competition in the long run (Figure 6.3), the maximum profit is achieved when equality is fulfilled.

Distinguish between a firm's equilibrium in the short run and the long run. In the short run, a perfectly competitive firm can operate either at a profit or at a loss. If the firm is profitable, then the difference between total revenue and total costs, between price and average cost is positive. If the firm is unprofitable, this difference is negative.

In the short run, there are two main types of firms: profitable (price above average total cost) and unprofitable (price below average total cost).

It is clear that any profitable firm seeks to maximize profits, and any unprofitable firm seeks to minimize losses. The realization of this or that goal means the achievement of a state of equilibrium. The task is to determine such a volume of output in the case of a profitable company, at which the amount of profit will be the largest, and in the case of a loss-making firm, the amount of losses will be the least.

As output increases, both total revenue and total costs increase. But if the income from the sale of an additional unit of output of a perfect competitor remains unchanged and equal to the price, then marginal cost increases in accordance with the law of diminishing returns. As a result of how the ratio between income and costs changes, the amount of total profit or total losses changes.

A perfectly competitive firm always maximizes total profit or minimizes total loss at the level of output at which marginal cost equals marginal revenue, which is the same as price.

As long as marginal revenue is greater than marginal cost (MR > MC), each additional unit of output, bringing profit, increases the total profit or reduces the total loss. In any of these cases, production should continue. After the marginal cost exceeds the marginal income (MC > MR), the sale of each additional unit of production becomes unprofitable, therefore, the size of the total profit decreases or the size of the total losses increases. At the same time, it makes no sense to expand production.

The zero value of marginal profit (marginal loss), obtained when marginal income and marginal costs are equal (MR = MC), means that there is no increase or decrease in total profit, and no reduction or increase in total losses. It is in this case that the volume of gross profit will be the largest, and the amount of losses - the smallest.

Let's supplement our conditional example with data on the value of total costs, on the basis of which it is possible to calculate the value of marginal costs and profits (Table 4.2).

The table shows that the equilibrium condition is realized when the output is 19 units. production, since the release of the 20th unit leads to a decrease in the total profit. The absence of absolute equality between marginal cost (475 rubles) and price (500 rubles) only means that output can be represented as a continuous function, so the maximization effect can occur at a point lying between the integer values ​​​​of the argument (Fig. 4.4).

In the case of a loss-making firm, on the basis of a similar principle, the problem of minimizing total losses is solved.

Therefore, the condition for the equilibrium of both a profitable and unprofitable perfectly competitive firm in the short run is the equality of marginal cost and marginal revenue, which coincides with the price:

MS = MR (R).

This situation can be illustrated graphically (Fig. 4.5).

Table 4.2

The volume of production of a firm that maximizes profits in conditions of perfect competition (rubles)

R	Demand quantity Q, PCS.	Gross income TR=PQ	marginal revenue MR = ATR: AQ	General costs TS	Average cost AC = TC: Q	marginal cost MS = PBX: AQ	Total profit TPr = TR - TS
						–

Rice. 4.4.

Rice. 4.5.

a - profit maximizing; b - minimizing losses

The equilibrium situation for profitable and unprofitable firms differs in that on the equilibrium graph of a profitable firm, the price line R passes above (Fig. 4.5, a ), and on the equilibrium graph of a loss-making firm - below the average cost line ATS (Fig. 4.5, b ). In both cases, equilibrium is the point E, where do the marginal cost curves intersect? MS and marginal revenue coinciding with the price MR = R. This point determines the equilibrium output Q. The product of the price (which is the same for any output) and the equilibrium output gives the equilibrium income TRe = P Qe, which is represented by the area of ​​the rectangle 0PeEQe. Total income includes:

• 0MKQe ) plus total profit (rectangle area ΜΡeΚ ) in the case of a profitable firm;
• total cost (rectangle area 0MKQ minus total loss (rectangle area ΜΡeΚ ) in the case of a loss-making firm.

Maximizing the total profit or minimizing the total loss will determine the equilibrium situation.

When marginal and average costs are equal, i.e. at the point of minimum average cost BUT, profit per unit of output will be maximum or losses will be minimal. However, the manufacturer is interested in the maximum of not single, but total profit (in the same way, at least not single, but total losses), so he does not stop production when the volume Q", and continues until Qe.