Firm equilibrium in the long run. Equilibrium of firm and industry in the long run. Factors in the formation of the economic equilibrium of the company

In the long run, unlike the short run, all inputs are variable. As a result, the firm has more than in the short run, the ability to change the level of output. On the other hand, the number of firms in an industry may change over the long run. Both of these factors influence the achievement of long-term equilibrium in a perfectly competitive market.

Under industry in this case, we mean a set of manufacturers - firms offering completely homogeneous goods for sale. The industry is in a state of long-term balanced, when none of the firms seeks to enter or exit the industry, and when none of the firms operating in the industry seeks to either increase or decrease its output.

Suppose there are a very large number of firms in an industry with the same marginal and average cost functions. Choosing its level of output, a separate competitive firm focuses on the market price (Fig. 10.8).

Rice. 10.8.

In the short run at the market price R x(Fig. 10.8a) the firm chooses output ( q x), corresponding to the point of intersection of the price line and the curve of short-term marginal costs (MC - Fig. 10.86). At the same time, it receives an economic profit equal to the area P x E x MN .

In the long run, the firm has the ability to increase production. At the same time, to maximize profit at the same price (P x) she chooses to release q 2) at which the price is equal to the long-run marginal cost ( LMC). As a result, at a price R x the firm increases its economic profit, which now corresponds to the area P X E 2 FG.

However, all other firms also increase their production, which leads to an increase market supply(shift of the supply curve to the right in Fig. 10.8a) and lower prices. On the other hand, new firms enter the industry, attracted by economic profits, further increasing supply. This increase in supply continues until the supply curve comes from position 5 to position S2(Fig. 10.8a). The price falls to the level R 2, those. to the level of the minimum long-term average costs of an individual firm (Fig. 10.86). Her output is now q2, the long-run average cost of such an output is minimal, and the economic profit earned by the firm disappears. New firms cease to enter the industry, and existing firms lose the incentive to reduce or expand production. Long-term balance has been reached.

On fig. 10.86 it can be seen that in the conditions of long-term equilibrium at perfect competition equality is achieved

In other words, the market price at which a firm sells its output is equal to its long-run marginal cost and, at the same time, its minimum long-run average cost.

Let's summarize:

  • under conditions of perfect competition, when firms can freely leave the industry and enter it, no firm is able to earn economic profit in the long run(surplus profit);
  • perfect competition leads to efficient use of available resources. The point here is that economically efficient production means the output at which the cost per unit of output (long run average cost) is minimal. It is to such output volumes that, in the final analysis, all perfectly competitive firms come.
  • It is clear that a perfectly competitive industry is the same abstraction as a perfectly competitive market. Real-life industries - automotive, oil, etc. - produce and sell various goods, although they are more or less close substitutes. 252 Microeconomics
  • If you do not understand why this is so, go back to section 10.3.

In the market of perfect competition in the same industry, there are many firms that have the same specialization, but different directions of development, scale of production and cost. If the price of goods and services begins to rise, this encourages the entry of new firms into the market that wish to carry out their production and marketing activities here, and also strengthens the position of existing ones that occupy a large market share. With a decrease in the cost of products sold on the market of goods and services, weak and small firms, due to excessively high costs, cannot compete and disappear from the market. Firm equilibrium in the short run. In market theory, the short run is the period when the number of firms in an industry and the size of the capital of each firm are fixed, but firms can change output by changing the number of variable factors, in particular labor. The goal of the firm is profit maximization. Profit (P) is the difference between revenue and total costs of the firm: P = TR - TS. Both the revenue and the firm's costs are networks of the output function (q). Since, in the function of revenue (TR = P * q), the market price is not under the control of a perfectly competitive firm, the task of the latter is to determine the output at which its profit will be maximized. The firm maximizes profit on output when its marginal revenue equals its marginal cost: MR = MC. The equality MR = MC as a condition for profit maximization can be justified logically. Each additional unit of output brings the firm some additional revenue (marginal revenue), but also requires additional costs (marginal cost). If marginal revenue exceeds marginal cost at a given level of output, then the firm earns more profit by producing one more unit of output. Conversely, if marginal revenue for a given output is below marginal cost, the firm can increase profits by decreasing output by one unit. If, finally, marginal revenue coincides with marginal cost, then no change in production can increase profits - the achieved output is optimal. The firm is in a state of equilibrium - in order to maximize profits, it does not need to increase or decrease its output. Since the marginal revenue of a perfectly competitive firm is equal to the price of the good, the above equality becomes: P = MC.

If the firm's total (variable) cost function is continuous and differentiable, then to find the equilibrium output of a perfectly competitive firm, one must first find the marginal cost function (taking the derivative of the total or variable costs output) and then equate it to the price of the good. Equilibrium of firm and industry in the long run

In the long run, unlike the short run, all inputs are variable. As a result, the firm has greater than in the short run, the ability to change the level of output. On the other hand, the number of firms in an industry may change over the long run. Both of these factors influence the achievement of long-term equilibrium in a perfectly competitive market. In this case, an industry is understood as a set of manufacturers - firms offering completely homogeneous goods for sale.

An industry is in a long-run equilibrium when no firm seeks to enter or exit the industry, and when no firm in the industry seeks to either increase or decrease its output. Suppose there are a very large number of firms in an industry with the same marginal and average cost functions. Choosing its level of output, a separate competitive firm focuses on the market price (Fig. 10.8).

In the short run, at the market price P1 (Fig. 10.8a), the firm chooses output (q1) corresponding to the point of intersection of the price line and the short-term marginal cost curve (MC - Fig. 10.86). At the same time, it receives an economic profit equal to the area. In the long run, the company has the opportunity to increase production. At the same time, to maximize profit at the same price (P1), she chooses output (q2) at which the price is equal to the long-run marginal cost (LMC). As a result, at price P1, the firm increases its economic profit, which now corresponds to the area. However, all other firms also increase their production, which leads to an increase in market supply (shift of the supply curve to the right in Fig. 10.8a) and a decrease in price. On the other hand, new firms enter the industry, attracted by economic profits, further increasing supply. This increase in supply continues until the supply curve comes from position S1 to position S2 (Fig. 10.8a). At the same time, the price falls to the level P2, i.e. to the level of the minimum long-term average costs of an individual firm (Fig. 10.86). Its output is now Q3, the long-run average cost of such an output is minimal, and the economic profit earned by the firm disappears. New firms cease to enter the industry, and existing firms lose the incentive to reduce or expand production. Long-term balance has been reached. On fig. 10.86 it can be seen that in conditions of long-term equilibrium with perfect competition, equalities are achieved: P = LMC = LAC. In other words, the market price at which a firm sells its output is equal to its long-run marginal cost and, at the same time, its minimum long-run average cost.

Let's summarize: in conditions of perfect competition, when firms can freely leave the industry and enter it, no firm is able to receive economic profit (surplus profit) in the long run; perfect competition leads to efficient use of available resources. The point here is that economically efficient production means output at which the cost per unit of output (long run average cost) is minimal. It is to such output volumes that, in the final analysis, all perfectly competitive firms come. one.

More on the topic of Firm Equilibrium in the Short and Long Runs in a Perfectly Competitive Market.:

  1. Equilibrium of a firm - a monopolistic competitor in the short run
  2. 9.1. Demand and supply of labor. Determination of the average level of wages Wages in conditions of perfect competition.
  3. 14. Offer of a perfectly competitive firm in the short and long run
  4. 25. Short-term and long-term equilibrium of a competitive firm
  5. Equilibrium of a firm in the short and long run in a perfectly competitive market.
  6. 8.8. DEMAND IN THE LABOR MARKET UNDER THE CONDITIONS OF PERFECT IMPERFECT COMPETITION
  7. 3.8 EQUILIBRIUM OF AN ENTERPRISE UNDER PERFECT AND IMPERFECT COMPETITION

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Equilibrium means such a state of the market, which, at a certain price, is characterized by an equilibrium of supply and demand.

Under perfect competition, a firm cannot influence the price of the product it sells. Its only opportunity to adapt to market changes is to change the volume of production. In the short run, the number of individual factors of production remains unchanged. Therefore, the stability of the firm in the market, its competitiveness will be determined by how it uses variable resources.

There are two universal rules that apply to any market structure.

The first rule states that it makes sense for a firm to continue functioning if, at the level of production reached, its income exceeds variable costs. The firm should stop production if the total income from the sale of goods produced by it does not exceed variable costs (or at least not equal to them).

The second rule states that if the firm decides to continue production, then it must produce such a quantity of output that marginal revenue equals marginal cost.

Based on these rules, we can conclude that the firm will introduce such a number of variables that, at any volume of production, equalize its marginal cost with the price of the goods. In this case, the price must exceed the average variable costs. If the price on the market of the goods produced by the firm and the cost of production remain unchanged, then it makes no sense for a profit-maximizing firm to either reduce or increase production. In this case, the firm is considered to have reached its equilibrium point in the short run.

Firm equilibrium in the long run. The equilibrium conditions for a firm in the long run are:

  • - the marginal cost of the firm must be equal to the market price of the goods;
  • - the firm should earn zero economic profit;
  • - the company is not able to increase profits by unlimited expansion of production.

These three conditions are equivalent to the following:

  • - industry firms produce products in volumes corresponding to the minimum points of their average total cost curves in the short run;
  • - for all firms in the industry, their marginal cost of production is equal to the price of the good;
  • - firms in the industry produce products in volumes corresponding to the minimum points of their average cost curves in the long run.

In the long run, the level of profitability is the regulator of the resources used in the industry.

When all firms in an industry operate at minimum cost in the long run, the industry is said to be in equilibrium. This means that at a given level of technology development and constant prices for economic resources, each firm in the industry completely exhausts its internal reserves for optimizing production and minimizes its costs. If neither the level of technology nor the prices of factors of production change, then any attempt by the firm to increase (or decrease) output will result in losses.

Income and profit of the company: economic and accounting, functions and sources of profit, growth factors

Millions of economic entities participate in the modern national economy, the purpose of which is profit. Among them are those that are commonly called economic agents - households, the state as a whole and its economic structures, banks, insurance and credit companies, individual enterprises and partnerships, joint-stock companies etc. The market economy has put forward its most effective form of organizing the functioning of economic agents - the firm. chief actor the entrepreneur is in the firm.

First, profit is a payment for the services of entrepreneurial activity. Secondly, profit is a payment for innovation, for talent in managing a company. Thirdly, profit is a payment for risk, for the uncertainty of business results.

The economic content of profit is manifested in its functions. Three functions are usually called fundamental. This is a stimulating, distributive and indicator of the effectiveness of the enterprise. As already noted, the profit of the firm as economic category characterizes financial results business activities of enterprises. Profit - as the final financial result of the company's activities, is the difference between the total amount of income and the cost of production and sale of products, taking into account losses from various business operations. Thus, profit is formed as a result of the interaction of many components with both positive and negative signs. Let's take a closer look at these components.

The formation of economic profit is influenced, first of all, by the total (gross) income received in the course of entrepreneurial activity. Gross income is the amount of income a firm receives from the sale of a given quantity of a good.

where TR (total revenue) - total revenue;

Р (price) - price;

Q (quantity) - sold amount of goods.

Substituting formula (2) into formula (1), we get:

Thus, the amount of profit depends on the number of products sold, its price, as well as the total costs associated with the production and sale of products. Costs are the costs of producing and selling a product.

According to the types of costs, accounting profit and economic profit are distinguished.

The indicator of accounting profit is not without drawbacks. The main ones are the following:

  • - there is no unambiguous and clear formulation of the concept of accounting profit in both domestic and foreign literature;
  • - by virtue of the assumption of accounting standards different countries(and often within the same country for different enterprises) the possibility of using different approaches in determining certain incomes and expenses, profit indicators calculated by different enterprises may not be comparable;
  • - changes in the general price level (inflationary component) limit the comparability of data on profits calculated for different reporting periods.

The amount of profit reflected in financial statements, does not allow assessing whether the capital of the company was increased or wasted for reporting period, since in the financial statements at the moment they do not fully reflect all economic costs enterprises to attract long-term resources.

From an economic point of view, the capital of an enterprise is multiplied when the economic benefits received by the enterprise from the use of long-term resources exceed the economic costs of attracting them (whether it be borrowed or shareholders' funds). The reverse is also true: if the received economic benefits are less than the estimated value of the "cost of capital", the enterprise is actually wasting capital. This provision is actively used in investment analysis and by the majority of investors when making investment decisions, including decisions to acquire shares in a particular enterprise.

However, it should be noted that it is currently impossible to obtain such information directly from the financial statements. In other words, the enterprise can be profitable according to the data accounting, but "eat up" your capital.

The existence of the concepts of "accounting" and "economic" profit does not mean the possibility of a direct comparison of their values. Each indicator has its own scope. It seems more correct to characterize them as complementary ways of analyzing the activities of economic entities

The market mechanism of perfect competition. Firm balance. Producer surplus, consumer surplus and trade-offs

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

This means that any arbitrarily small increase in the price of one producer above the market level leads to a reduction in demand for his products to zero. Thus, the difference in prices may be the only reason for preferring one or another firm. There is no non-price competition.

The number of economic entities on the market is infinitely large, and their share is so small that the decisions of an individual firm (individual consumer) to change the volume of its sales (purchases) do not affect the market price of the product. This, of course, assumes that there is no collusion between sellers or buyers to obtain monopoly power on the market. The market price is the result of the combined actions of all buyers and sellers.

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

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

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

However, the perfect competition model:

  • allows you to explore markets in which a large number of small firms sell homogeneous products, i.e. markets similar in terms of conditions to this model;
  • clarifies the conditions for profit maximization;
  • is the standard for evaluating the performance of the real economy.

Producer surplus represents that of a producer. Producer surplus is the difference between the market price and the marginal cost of output. Marginal cost refers to the minimum price at which a firm would be willing to produce each additional unit of output at all. Graphically, this surplus can be shown as the area above the supply curve, up to the market price line (shaded area in Figure 1).

The concepts of consumer surplus and producer surplus can be used to assess the effects of government pricing policy. Let us assume that the state fixes the price of some commodity at the level P1 below the equilibrium price P0 (see Fig. 2). From the previous discussion, we know that this leads to a shortage (Q2-Q1), because when the price decreases, the quantity demanded increases, but producers reduce production.

Market Mechanism imperfect competition Keywords: pure monopoly, natural monopoly, antitrust regulation

The modern market economy is a complex organism, consisting of a huge number of various industrial, commercial, financial and information structures interacting against the backdrop of an extensive system. legal regulations business, and united by a single concept - the market. The main features of a pure monopoly:

  • - one seller in the industry (industry and firm are the same);
  • - a unique product is produced (there are no close substitutes);
  • - Barriers to entry of other firms into the industry are so powerful that entry into the industry is blocked.

All this taken together explains why a pure monopoly has maximum power over the market.

Under a natural monopoly, competition is impossible, but it is not needed. Natural monopolies are either subject to economic regulation by the state (USA and UK), or are in state property(most European countries). In both cases, the state sets prices for the products of natural monopolies, while it is desirable that P = MC (as in pure competition). But since this is impossible, therefore, they strive to establish P = AC. State regulation natural monopolies is designed to imitate the work of the market, that is, to set the price at the level of P=MC=AC;

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 goods that the firm produces. In economic theory, three general cases of the ratio of average costs (AC) of the firm and the market price (P) are considered, which determine the position of the firm in the industry in the short term - the presence of losses, receiving normal profits or excess profits.

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

Rice. 6.8. The company is making a loss

In the second case, the firm achieves equality between average costs and price (AC = P) with the volume of production Q e, which characterizes the equilibrium of the firm in the industry. After all, the function of the average costs of the firm can be considered as a function of supply, and demand, as we remember, is a function of price (P). Here, equality is achieved between supply and demand, i.e., equilibrium. The volume of production Q e in this case is equilibrium. Being in a state of equilibrium, the firm receives only normal profit, including accounting profit, and economic profit is zero. The presence of a normal profit provides the firm with a favorable position in the industry.

The absence of economic profit creates an incentive to seek competitive advantage- 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.

Rice. 8.8. Firm earning excess profits

However, it is possible to more accurately determine the moment when it is necessary to stop increasing production so that the profit does not turn into losses, as, for example, with the output at the level of Q 3 . To do this, it is necessary to compare the marginal costs (MC) of the firm with the market price, which for a competitive firm is at the same time marginal revenue (MR). Recall that marginal costs reflect the individual cost of producing each next unit of goods and change faster than average costs. Therefore, the firm reaches its maximum profit (at MC = MR) much earlier than the average cost equals the price of the goods.


The condition for marginal cost to be equal to marginal revenue (MC = MR) is production optimization rule.

Compliance with this rule helps the company not only maximize profits, but also minimize losses.

So, a rationally operating firm, regardless of the position in the industry (whether it suffers losses, whether it receives normal profits or excess profits), should produce only the optimal volume of products. This means that the entrepreneur will always stop at the volume of output at which the cost of producing the last unit of goods (i.e., MC) coincides with the amount of income from the sale of this last unit (i.e., with MR). We emphasize that this situation characterizes the behavior of the firm in the short run.

In the long run, the industry supply changes. This happens due to the growth or decrease in the number of market participants. If the equilibrium price at industry market, above average costs and firms earn excess profits, this stimulates the emergence of new firms in a profitable industry. The influx of new firms expands the industry offer. An increase in the supply of goods on the market leads to a decrease in prices. Falling prices automatically reduce the excess profits of firms.

Prices move up and down, each time passing through a level at which P = AC. In this situation, firms do not incur losses, but do not receive excess profits. Such a long-term situation is called equilibrium.

In equilibrium, when the demand price coincides with average costs, the firm produces according to the optimization rule at the level of MR = MC, that is, it produces the optimal volume of production.

Thus, the equilibrium is characterized by the fact that the values ​​of all parameters of the firm coincide with each other:

AC=P=MR=MC.

Since the MR of a perfect competitor is always equal to the market price P = MR, the equilibrium condition for a competitive firm in the industry is the equality

AC = P = MS.

The position of a perfect competitor upon reaching equilibrium in the industry is shown in the following figure.

Rice. 9.8. Firm in equilibrium

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

In the long-run (LR - long-run) period, the fixed costs of the firm FC increase when its production capacity increases. In the long term, the expansion of the scale of the company using appropriate technologies gives economies of scale. The essence of this effect is that the long-term average costs of LRAC, having decreased after the introduction of resource-saving technologies, cease to change and remain at a minimum level as output increases. After the economies of scale are exhausted, average costs begin to grow again.

The behavior of average costs in the long run is shown in Figure 10.8, where economies of scale are observed when the volume of production changes from Q a to Q b . Over the long run, the firm changes its scale in search of the best output and lowest costs. According to the change in the size of the firm (the volume of production capacity), its short-term costs AC change. Different options for the scale of the firm, depicted in Figure 10.8 as short-term AC, give an idea of ​​​​how the volume of output of the firm in the long run (LR) can change. The sum of their minimum values ​​is the firm's long-run average cost (LRAC).

Rice. 10.8. The average cost of the firm in the long run

In the long run, the best scale for a firm is that at which short run average cost reaches the minimum level of 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. Thus, the firm achieves long-term equilibrium. In conditions of equilibrium in the long term, 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 Figure 11.8.

Rice. 11.8. The position of the firm in a long-run equilibrium

In the long run, the equilibrium of a competitive firm is characterized by the fact that the optimal volume of production is achieved subject to the equality P = MC = AC = LRAC.

Under these conditions, the firm finds the optimal scale of production capacity, i.e., optimizes the long-term output.

Note that economic profits under perfect competition are short-term. Being in a state of long-term equilibrium, the firm receives only normal profit.

In this position, the average and marginal costs of the firm coincide with the equilibrium price in the industry, which has developed when the industry-wide supply and demand are equalized. Note also that the condition for profit maximization is the equality of marginal revenue and marginal cost and the maximum gap between total income and total cost.

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 the firm's position 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 force, but also the percentage that the firm could receive on its capital if it were invested 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.

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