Equilibrium of the firm in the short run. Economic balance of a company in modern conditions
9.1 The concept of “production costs”. Fixed and variable costs. Total, marginal, average costs.
Production costs– these are the costs of producing products over a certain period of time (usually 1 year). Production costs are less than the advanced capital, because production costs include the cost of only the worn-out part of fixed assets, and advanced capital is the entire cost of material assets.
Let's look at the cost structure. There are fixed and variable costs.
Fixed costs– costs, the value of which remains constant when the volume of output changes. These include costs for lighting, heating, management costs, and building rental costs.
F.C.– fixed costs.
Variable costs– costs, the value of which changes with changes in output volume. These include the costs of raw materials and labor.
V.C.– variable costs.
Gross costs (TC)– the sum of fixed and variable costs.
The TC curve becomes steeper as output increases because the marginal product decreases.
In addition to the above-mentioned type costs, costs per unit of production are also considered, namely - marginal costs (MC), incremental costs and average costs (AC).
Marginal cost– additional costs required to produce one more unit of output. The MC curve first has a negative slope, then reaches a minimum point, then smoothly rises to the top. The MC graph shows that marginal costs decrease because the positive effect of production scale and access to optimal technology are reflected. Then, when less efficient resources and technologies have to be used to further increase production, marginal costs begin to increase.
Average NPP costs (unit costs)– the cost of producing a unit of output. The AC graph has a figurative form (?).
AFC = FC/a (average fixed costs)
AVC = VC/Q (average, variable costs)
When M.C. When MC>AC, the average cost curve goes up: producing new products increases average costs. When AC is minimal, then MC = AC. The MC curve intersects the AVC and ATC curves at the points of their minimum values. If M.C. If MC>AC, then AC increases. Comparison of MS and AC is important information for managing a company, for certain optimization of production sizes, within which the company consistently makes a profit. 9.2 Equilibrium of the company in the short term.
The short-term period of operation of a company is a time period during which the company cannot change the volume of at least one of the types of production resources it has. Typically, production capacity is considered as a fixed resource. When comparing costs and revenues, a firm seeking to maximize profits must follow two rules: 1) release limit rule 2) closing rule The marginal output rule states that for the latter. release. units products must be satisfactory. equality: MR (marginal revenue) = MC (marginal cost) The equilibrium point of the firm and maximum profit is reached in the case of equality of marginal revenue and costs for the subsequent output of a unit of output. When a firm has reached this level of production, it is in equilibrium. If MR>MC, then the output volume is not optimal and it needs to be increased until for the last unit of production MC=MR When MR>MC, the firm receives less profit. If MC>MR, the output volume is not optimal, it should be reduced until MR=MC. The closure rule states that a firm closes out of a given market if economic profit< 0 при любом объеме производства. These two rules are general. They are universal. They are applicable regardless of the type of market the company operates in (monopoly, perfect competition, etc.). In the short term (2-3 years), to make a decision on whether to continue or immediately close production, the company compares revenue not with total costs, but only with variables, because It is believed that fixed costs have already been made and cannot be changed, even if production is closed. Therefore, the company continues production for any period of time if revenue exceeds variable costs, even if such production is generally unprofitable. In the short term, one part of the company's resources is variable, the other is constant, respectively, one part of the costs is variable, the other is constant. In short-term conditions, the following types of firms are distinguished: 1) marginal firm 3) up to the limit The firm that manages to cover only average variable costs is called marginal, i.e. AVC = P (price). Such a company manages to stay afloat only for a short time, i.e. short term. If prices rise, then such a company will be able to cover not only the current AVC, but also the automatic telephone exchange, i.e. receive a normal profit. If prices decrease and AVC > P, then the firm will cease to be competitive and will turn from marginal to prohibitive. She will be forced to leave the industry. If P > ATC, then the firm is called pre-margin, and in appearance with normal profit it will receive excess profit. 9.3 Equilibrium of the company in the long run.
Long-term period of operation of the company– the time period during which a firm can change the amount of all employed production resources, including capital. Thus, in the long run, all costs are variable. In the long-term period, the value of average costs AC becomes especially important. The long-term average cost function is formed as follows: all resources and costs in the long run are variable and the volume of production capacity is chosen so as to maximize profit for each given volume of output. This requires minimizing average costs. Therefore, the graph of the function is long-term. AC shows the lowest average production costs with which any given volume of production can be achieved. The long-term average cost schedule AC consists, as it were, of glued sections of the short-term average cost schedules. Long-term average costs for all possible production volumes represent a smooth envelope of an infinite number of short-term cost schedules. Long-run equilibrium in the industry it is established in such a way that the price of products P=minAC, i.e. in the long run, an individual firm is in a stable equilibrium position, which is characterized by zero economic profit at minAC. Under perfect competition, long-run profit maximization occurs when MC=MR=P=AC. In the long run, when a firm changes the parameters of its activities, an effect of production scale arises. Returns from changes in scale of production is the relative change in output caused by a change in the scale of production. Returns to scale of production depend on the relative change in resource expenditures and on the properties of the production function. There are three types of returns to scale:
1) increasing (increased) 2) constant 3) decreasing If the volume of output grows faster than the quantity of resources, this means that there is a positive effect of scale in production (increased returns to scale). If output grows at the same proportion as resources, then this means a lack of economies of scale or constant returns. If output grows slower than resources, then this means reduced returns to scale. Positive economies of scale production is also called the mass production effect. As a firm increases its output, average costs decrease. Constant return– this is the invariance of long-term average costs with changes in output volume. Diseconomies of scale (diminishing)– an increase in average production costs in the long run as production volume increases. Reasons for the existence of scale of production. The emergence The positive effect of scale of production was facilitated by: a) specialization of labor, which ensured greater labor productivity and eliminated the loss of working time b) specialization of management personnel c) efficient use of equipment d) application of new technologies e) production of by-products All this will lead to increased efficiency and reduced unit production costs. A negative effect of scale occurs if, over a certain time interval of production, long-term ATS increases with an increase in output, i.e. there is damage from an increase in the scale of production. Reasons: technical factors (disruptions in the supply of raw materials, energy, auxiliary materials - all this will hit production costs), organizational reasons (loss of flexibility, efficiency in decision-making). The scale effect comes down to the fact that in some cases, an expansion in output will be accompanied by a decrease in ATC, and in others, by an increase. 9.4 Profit. Its economic role. Economic and accounting profit. The paradox of profit.
∏ (profit) = TR (revenue) – TC (gross costs) However, there are external (explicit) and internal (implicit) costs. Explicit payments include payments to suppliers. Subtracting explicit costs from TR's revenue, we obtain accounting profit: ∏ accounting = TR (revenue) – explicit costs Accounting profit takes into account explicit costs, but does not take into account implicit costs. Subtracting implicit costs from accounting profit, we obtain economic profit. ∏ economic = ∏ accounting – implicit costs ∏ economic = TR (revenue) – explicit costs – implicit costs Implicit costs include the costs of resources owned by the enterprise itself. This is a normal profit that comes from such an important resource as entrepreneurial talent. The profit paradox is that economic profit = 0. Normal profit (zero economic profit) is the opportunity cost of entrepreneurial ability employed. When a firm earns only normal profits, its income is completely spent on covering all the firm's costs. 6.2. Perfect competition. Equilibrium in the short and long run
A market under conditions of perfect competition has the following features: 1. A large number of firms operate in this market, each of which is independent of the behavior of other firms and makes decisions independently. Any firm in the industry is unable to influence the market price of the goods produced by the industry. 2. Firms in the industry produce the same (homogeneous) product, so it makes absolutely no difference to buyers which company’s product they buy. 3. The industry is open to entry and exit by any number of firms. Not a single company in the industry is taking any counteraction, nor are there any legal restrictions on this process. Individual firm demand. Since, in conditions of perfect competition, a firm in an industry, within the limits of changes in its output volumes, does not have a significant impact on the price of the product and sells any quantity of goods at a constant price, the demand for the products of an individual firm is absolutely elastic, and the demand curve of each firm is horizontal. In addition, each additional unit of goods sold will add to the firm's total revenue the same amount of marginal revenue equal to the price of the goods. Consequently, for an individual firm operating in a perfectly competitive market, the average and marginal revenues are equal to the price of the product P, i.e. МR = AR = P, therefore the demand, average and marginal revenue curves coincide and represent the same horizontal line drawn at the price level of the product. Equilibrium in the short and long run According to rules 1 and 2 (see Topic 6.1), operating in each market structure, a firm, in order to maximize profits, must produce such a volume of goods and services q E, at which MR = MC(rule 2) and P > AVC(rule 1). But under perfect competition, marginal revenue MR equals average revenue AR and the price of the product, i.e. MR = AR = P. This means that, operating in a perfectly competitive market, a firm will maximize profit if it produces a volume of q goods such that marginal costs equal the price of the goods set by the market regardless of the firm’s actions. This situation is shown in Fig. 13. Rice. 13. Equilibrium in the short run By producing Qe units of goods when MC = P, the firm maximizes profit, and any deviations from this volume reduce its profit. If the company produces Q1< Qe единиц товара, то цена товара (которая не меняется) станет превосходить предельные издержки, и фирма обязана в этих условиях увеличить производство, иначе она
не максимизирует прибыль. Когда же Q2 >Qe, marginal costs begin to exceed price and the firm needs to reduce output. Please note that at point E1 the marginal cost MR is also equal to the price of product P, but at point E (not E1) the price P exceeds the average variable cost AVC, i.e. rule 1 is satisfied. This means that it is at point E, and not E1, that the firm has equilibrium in the short run. Supply curve in the short run. Market price of the product. Let us assume that the initial price P, under the influence of the market, increased to P e1. As just shown, under these conditions the firm will increase output to a level Q e1 when marginal costs again equal P e1. Therefore, for any price Pi greater than AVC, the firm will produce so many units that the marginal cost MCi corresponding to that output equals Pi. But since the MC curve shows the value of marginal costs for any values of Q, then the points of the MC curve will determine production volumes at all price values when MC = P. In addition, according to rule 1, if the price of a product falls below the AVC value, then the firm will stop existence and Q = 0. But, as is known, the curve showing the relationship between the price of a product and the number of units of a product offered by a company for sale is a supply curve. This leads to an important conclusion: The supply curve of a firm operating in the short run under conditions of perfect competition is the segment of the marginal cost curve located above the AVC curve(segment VK in Fig. 13). If there are N firms in an industry, then supply curves can be constructed in a similar way for each of them. Then The industry supply curve can be obtained by horizontally summing the supply curves of individual firms. The market price of a product under conditions of perfect competition is determined by the point of intersection of the industry supply curve and the market demand curve. Although each firm in an industry does not significantly influence the market for a product, the joint actions of all firms in the industry (as reflected in the industry supply curve), as well as the collective actions of households (as reflected in the market demand curve) can lead to shifts in the demand and supply curves and changes in the equilibrium price . But at the new equilibrium price, each firm will strive to produce so many units of a homogeneous good so that MC = P. With such output volumes, QS of the industry equals market QD, and equilibrium occurs in the industry. However, the amount of profit received is of great importance for the company. The company makes a profit if the revenue per unit of production, i.e. AR, exceeds unit costs, i.e. ATS. But since AR = P, then this is equivalent to the statement that the firm receives economic profit whenever the market price of the product exceeds the average total costs, i.e. When P > ATS. This means that, depending on the value of the market price of the product, three options are possible. 1. The price of the product is lower than the average total costs for that volume of production q, when MC = P; in this case, the company will have losses (Fig. 14a). 2. With production volume q, the price of the product coincides with the value of average total costs and economic profit is zero. The value of production volume in this case reflects the so-called break-even point (Fig. 14b). The level of instability is observed when total costs are equal to total revenue TC = TR or when marginal and average costs are equal (MC = ATC). 3. The price of the product is higher than the average total costs for the production of q units of the product; in this case, the company will make a profit (Fig. 14 c). Rice. 14. Possible equilibrium options in the short term Consequently, a company, predicting its activities, must determine production volumes at which the minimum values of ATC and AVC are achieved. They will serve as a guide for the company’s behavior in a given market structure, allowing one to find the break-even level and the moment of production cessation. Equilibrium in the long run Over the long term, firms can adapt to various changes in the market. The long-term period in a perfectly competitive market is characterized by the following conditions: 1. Operating firms make the most efficient use of available capital equipment. This means that each firm in the industry in all short-term periods, which together form the long-term period, maximizes profit by producing such a volume of output when MS = P. 2. There are no incentives for firms from other industries to enter this industry. In other words, all firms in the industry have a production volume corresponding to the minimum average total costs in each short-term period, and receive zero profit, i.e. SATC = P. 3. Firms in the industry do not have the opportunity to reduce total costs per unit of production and make a profit by expanding the scale of production. This is equivalent to the condition that each firm in the industry produces a volume of output q* corresponding to the minimum of long-run average total costs, where the LATC curve has a minimum. It is important to note that since in perfect competition firms are free to enter and exit an industry, in long-run equilibrium each firm will have zero economic profit. (Materials are based on: V.F. Maksimova, L.V. Goryainova. Microeconomics. Educational and methodological complex. - M.: Publishing center of the EAOI, 2008. ISBN 978-5-374-00064-1) In a perfectly competitive market in one industry, there are many firms that have the same specialization, but different directions of development, scale of production and costs. 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 share of the market. When the cost of products sold on the market for goods and services decreases, weak and small firms, due to excessively high costs, cannot withstand competition and disappear from the market. Equilibrium of the firm in the short run. In market theory, the short-run is a period when the number of firms in an industry and the amount of 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 company is to maximize profits. Profit (P) is the difference between revenue and total costs of the company: P = TR - TC. Both the revenue and the firm's costs network the output function (q). Since the market price in the revenue function (TR = P * q) is beyond the control of a perfectly competitive firm, the latter's task is to determine the output at which its profit will be maximized. The firm maximizes profit at the output when its marginal revenue equals its marginal cost: MR = MC. The equality MR = MC as a condition for maximizing profit 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 certain 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 costs, then no change in production can increase profit - the achieved output is optimal. The firm is in a state of equilibrium - to obtain maximum profit it does not need to either increase or decrease its output. Since the marginal revenue of a perfectly competitive firm is equal to the price of the product, the above equality takes the form: 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 (by taking the derivative of the total or variable cost function with respect to output), and then equate it to the price of the product. Equilibrium of the firm and industry in the long run In the long run, unlike the short run, all production resources are variable. As a result, the firm has a greater ability to change the level of output than in the short run. On the other hand, the number of firms in the industry may also change in the long run. Both of these factors influence the achievement of long-run equilibrium in a perfectly competitive market. In this case, the industry refers to a multitude of manufacturers - firms offering completely homogeneous goods for sale. An industry is in a state of long-run equilibrium when no firm tends to either enter or exit the industry and when no firm in the industry tends to either increase or decrease its output. Suppose there are a very large number of firms in an industry with identical marginal and average cost functions. When choosing its level of output, an individual competitive firm focuses on the market price (Fig. 10.8). In the short run, at 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 firm has the opportunity to increase production. Moreover, to maximize profit at the same price (P1), she chooses output (q2) at which price equals long-run marginal cost (LMC). As a result, at price P1, the firm increases its economic profit, which now corresponds to area However, all other firms also increase their production, which leads to an increase in market supply (a shift of the supply curve to the right in Fig. 10.8a) and a decrease in price. On the other hand, new firms are entering the industry, attracted by economic profits, which further increases supply. This increase in supply continues until the supply curve moves from position S1 to position S2 (Fig. 10.8a). The price then drops to 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, long-term average costs at this output are minimal, and the economic profit received by the firm disappears. New firms stop entering the industry, and existing firms lose the incentive to reduce or expand production. Long-term equilibrium has been achieved. In Fig. 10.86 it is clear 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 products is equal to its long-run marginal cost and at the same time to its minimum long-run average cost. Let's summarize: in conditions of perfect competition, when firms can freely leave and enter an industry, not a single firm is able to receive economic profit (excess profit) over a long period of time; perfect competition leads to efficient use of available resources. The point here is that cost-effective production means output at which the cost per unit of output (long-run average cost) is minimal. It is precisely these output volumes that all perfectly competitive firms ultimately arrive at. 1. - Copyright - Advocacy - Administrative law - Administrative process - Antimonopoly and competition law - Arbitration (economic) process - Audit - Banking system - Banking law - Business - Accounting - Property law - State law and administration - Civil law and process - Monetary law circulation, finance and credit - Money - Diplomatic and consular law - Contract law - Housing law - Land law - Electoral law - Investment law - Information law - Enforcement proceedings - History of state and law - History of political and legal doctrines - Equilibrium means a state of the market that, at a certain price, is characterized by a balance between supply and demand. In conditions of perfect competition, a firm cannot influence the prices of goods sold. Its only ability 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 a company in the market and 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 operating if, at the achieved level of production, its income exceeds its variable costs. A firm should stop production if the total income from the sale of the goods it produces does not exceed variable costs (or at least is not equal to them). The second rule states that if a firm decides to continue production, then it must produce the quantity of output at which marginal revenue equals marginal cost. Based on these rules, we can conclude that the company will introduce such a number of variable factors that, for any volume of production, it will equalize its marginal costs with the price of the product. In this case, the price must exceed average variable costs. If the market price of a product produced by a firm and production costs remain unchanged, then it makes no sense for a firm maximizing its profit to either reduce or increase production. In this case, the firm is considered to have reached its equilibrium point in the short run. Equilibrium of the firm in the long run. Conditions for the firm's equilibrium in the long run: These three conditions are equivalent to the following: In the long term, the level of profitability is a regulator of the resources used in the industry. When all firms in an industry operate at minimum costs in the long run, the industry is considered to be in equilibrium. This means that at a given level of technology development and constant prices for economic resources, each company 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) production volumes will lead to losses. Income and profit of the company: economic and accounting, functions and sources of profit, growth factors The modern national economy involves millions of economic entities whose goal 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 own, the most effective form of organizing the functioning of economic agents - the firm. The main character in the company is the entrepreneur. Firstly, profit is payment for business services. Secondly, profit is the payment for innovation, for talent in managing the company. Thirdly, profit is a payment for risk, for the uncertainty of business results The economic content of profit is manifested in its functions. Typically, three functions are considered fundamental. This is a stimulating, distributive and indicator of the efficiency of the enterprise. As already noted, the profit of a company as an economic category characterizes the financial result of the entrepreneurial activities of enterprises. Profit - as the final financial result of a company's activities, is the difference between the total amount of income and the costs of production and sales 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 process of entrepreneurial activity. Total income is the amount of income a firm receives from selling a certain amount of a good. where TR (total revenue) is total income; P (price) - price; Q (quantity) - quantity of goods sold. Substituting formula (2) into formula (1), we get: Thus, the amount of profit depends on the quantity 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 accounting profit indicator is not without its shortcomings. The main ones can be identified as follows: The amount of profit reflected in the financial statements does not allow us to assess whether the company’s capital was increased or wasted during the reporting period, since the financial statements currently do not fully reflect all the economic costs of the enterprise to attract long-term resources. From an economic point of view, the capital of an enterprise increases when the economic benefits received by the enterprise from the use of long-term resources exceed the economic costs of attracting them (whether borrowed or shareholder funds). The opposite is also true: if the economic benefits received are less than the calculated value of the “cost of capital,” the enterprise is actually wasting capital. This provision is actively used in investment analysis and by most investors when making investment decisions, including decisions to purchase shares of a particular enterprise. However, it should be noted that it is currently impossible to obtain such information directly from financial statements. In other words, an enterprise can be profitable according to accounting data, but “eat up” its capital. The existence of the concepts of “accounting” and “economic” profit does not mean the possibility of a direct comparison of their meanings. Each indicator may have its own scope of application. It seems more correct to characterize them as complementary ways of analyzing the activities of business entities. Perfect competition market mechanism. Firm equilibrium. Producer surplus, consumer surplus and mutual benefit of exchange The products of firms are homogeneous, so consumers do not care which manufacturer they buy them from. All goods 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, no matter how small, increase in price by one manufacturer above the market level leads to a reduction in demand for its products to zero. Thus, the difference in prices may be the only reason for preferring one or another company. There is no non-price competition. The number of economic entities in the market is unlimitedly large, and their share is so small that the decisions of an individual company (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 in the market. The market price is the result of the joint actions of all buyers and sellers. Freedom of entry and exit on the market. There are no restrictions or barriers - there are no patents or licenses limiting activities in this industry, significant initial capital investments are not required, the positive effect of scale of production is extremely insignificant and does not prevent new firms from entering the industry, there is no government intervention in the mechanism of supply and demand ( subsidies, tax breaks, quotas, social programs, etc.). Freedom of entry and exit presupposes the absolute mobility of all resources, the freedom to move them geographically and from one type of activity to another. Perfect knowledge of all market entities. All decisions are made with certainty. This means that all firms know their revenue 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 fully satisfy them. However, the perfect competition model: Producer surplus is the equivalent of producer surplus. Producer surplus is the difference between the market price and the marginal cost of output. Marginal cost indicates the minimum price at which a firm would be willing to produce each additional unit of output. Graphically, this surplus can be shown as the area above the supply curve, up to the market price line (shaded area in Fig. 1). The concepts of consumer surplus and producer surplus can be used to evaluate the effects of government pricing policies. Let us assume that the state fixes the price of any good at level P1 below the equilibrium price P0 (see Fig. 2). From the previous discussion, we know that this leads to a shortage (Q2-Q1), since when the price decreases, the quantity demanded increases, but producers reduce production. Market mechanism of imperfect competition: pure monopoly, natural monopoly, antitrust regulation The modern market economy is a complex organism, consisting of a huge number of diverse production, commercial, financial and information structures, interacting against the backdrop of an extensive system of business legal norms, and united by a single concept - the market. The main features of a pure monopoly: All this taken together explains why a pure monopoly has maximum power over the market. With a natural monopoly, competition is impossible, but it is not necessary. Natural monopolies are either subject to economic regulation by the state (USA and UK) or are state-owned (most European countries). In both cases, the state sets prices for the products of natural monopolies, and it is desirable that P = MC (as in pure competition). But since this is impossible, they therefore strive to establish P = AC. State regulation of natural monopolies is designed to imitate the operation of the market, that is, set the price at the level P=MC=AC; Rational behavior for a commercial company is considered one that provides maximum possible profit.
The choice of behavior model is determined two main circumstances
:
. temporary factor(short or long period); . type of competition(perfect or imperfect). IN A SHORT PERIOD, if it is required to increase production volume, the firm can achieve this, increasing only variable factors(labor, materials, raw materials, etc.). The company does not have time to change constant factors (size of structures, number of machines). IN A LONG PERIOD the firm's behavior is different: in response to a constantly changing level of production, it has the opportunity change all factors of production. So they all become variables. During this period, the company seeks to minimize costs by combining factors, replacing labor with capital and vice versa. The influence of the type of competition on firm behavior is more complex. Consider the rational behavior of the company in conditionsPERFECT COMPETITION.
In a perfectly competitive market, no firm influences
on the price of its products.
What can an entrepreneur do to get maximum profit? It can only change production volumes. The question then becomes: How much of a product should a firm produce and sell to maximize its profit? To answer this question, you need to compare the market price of the product and the firm's marginal cost. If a firm increases its output by one, two, three, etc. units, then each subsequent unit (say, each new television) will add something to both total income and total costs. It is something" - ultimateincome And marginal cost.
If marginal revenue is greater than marginal cost, then each new television produced adds more to total revenue than it adds to total cost. This means that the difference between marginal revenue (marginal revenue —
M.R.)
and marginal costs (marginal cost- MS), i.e. profit (profit- R), - increases: P =
M.R.-
M.C..
The opposite occurs when marginal cost is greater than marginal revenue. Conclusion:the maximum total profit is achieved whenequality occurs between price and marginalcosts: R
= MS.
If R
> MS,
then production needs to be expanded.
If R< МС,
then production must be reduced.
The firm's equilibrium point and maximum profit is reachedin the case of equality of marginal revenue and marginal costs.
When a firm has reached this ratio, it will not increase production, output will be stable, hence the name "firm equilibrium": MS= M.R..
Rational behavior of the companyin conditions of IMPERFECT COMPETITION OTHERWISE.
In a monopolistic market, a firm influences the price of its products.
If in a perfectly competitive market the additional income from the sales of successive units of production is constant and equal to the market price, then in a monopolistic market an increase in sales reduces the price, and therefore the additional, i.e. marginal, income (marginal revenue —
M.R.).
This arises because in a saturated market, a monopolist can increase production only by lowering prices. Exists two ways to determine the volume of production at which the company will receive maximum profit
.
With the first method compare gross income and gross costs for each volume of production. With the second method determine the optimal volume of production by comparing marginal revenue and marginal cost.More on the topic: Equilibrium of a firm in the short and long run in a perfectly competitive market: