Improving production, reducing production costs, automating all processes, optimizing the structure of enterprises - all this is an important condition for the development of modern business. What is the best way to get businesses to do all this? Market only.
The market is understood as the competition that occurs between enterprises that produce or sell similar products. If there is a high level of healthy competition, then in order to exist in such a market, it is necessary to constantly improve the quality of the product and reduce the level of total costs.
The concept of perfect competition
Perfect competition, examples of which are given in the article, is the complete opposite of monopoly. That is, it is a market in which an unlimited number of sellers operate who deal with the same or similar goods and at the same time cannot influence its price.
At the same time, the state should not influence the market or engage in its full regulation, since this can affect the number of sellers, as well as the volume of products on the market, which is immediately reflected in the price per unit of goods.
Despite the seemingly ideal conditions for doing business, many experts are inclined to believe that perfect competition will not be able to exist in the market for a long time in real conditions. Examples that confirm their words have happened more than once in history. The end result was that the market became either an oligopoly or some other form of imperfect competition.
can lead to decline
This is due to the fact that prices are constantly decreasing. And if the human resource in the world is large, then the technological one is very limited. And sooner or later, enterprises will move to the fact that all fixed assets and all production processes will be modernized, and the price will still fall due to attempts by competitors to conquer a larger market.
And this will already lead to functioning on the verge of the break-even point or below it. It will be possible to save the situation only by influence from outside the market.
Key Features of Perfect Competition
We can distinguish the following features that a perfectly competitive market should have:
A large number of sellers or manufacturers of products. That is, all the demand that is on the market must be covered by more than one or several enterprises, as in the case of monopoly and oligopoly;
Products in such a market must be either homogeneous or interchangeable. It is understood that sellers or manufacturers produce such a product that can be completely replaced by products of other market participants;
Prices are set only by the market and depend on supply and demand. Neither the state, nor specific sellers or manufacturers should influence pricing. The price of a product should be determined by the level of demand as well as supply;
There should be no barriers to entry or entry into a perfectly competitive market. Examples can be very different from the small business sector, where special requirements are not created and special licenses are not needed: ateliers, shoe repair services, etc.;
There should be no other influences on the market from the outside.
Perfect competition is extremely rare.
In the real world, it is impossible to give examples of perfectly competitive firms, since there is simply no market that operates according to such rules. There are segments that are as close as possible to its conditions.
To find such examples, it is necessary to find those markets in which small business mainly operates. If any firm can enter the market where it operates, and it is also easy to exit it, then this is a sign of such competition.
Examples of Perfect and Imperfect Competition
If we talk about imperfect competition, then monopoly markets are its brightest representative. Enterprises that operate in such conditions have no incentive to develop and improve.
In addition, they produce such goods and provide such services that cannot be replaced by any other product. This explains the poorly controlled, established non-market way. An example of such a market is a whole sector of the economy - the oil and gas industry, and Gazprom is a monopoly company.
An example of a perfectly competitive market is the provision of automotive repair services. There are a lot of various service stations and car repair shops both in the city and in other settlements. The type and amount of work performed is almost the same everywhere.
It is impossible in the legal field to artificially increase the prices of goods if there is perfect competition in the market. Examples confirming this statement, everyone saw in his life repeatedly in the ordinary market. If one seller of vegetables raised the price of tomatoes by 10 rubles, despite the fact that their quality is the same as that of competitors, then buyers will stop buying from him.
If at can influence the price by increasing or decreasing supply, then in this case such methods are not suitable.
Under perfect competition, it is impossible to raise the price on its own, as a monopolist can do.
Due to the large number of competitors, it is simply impossible to raise the price, since all customers will simply switch to purchasing the relevant goods from other enterprises. Thus, an enterprise may lose its market share, which will entail irreversible consequences.
In addition, in such markets there is a decrease in the prices of goods by individual sellers. This happens in an attempt to "win" new market shares to increase revenue levels.
And in order to reduce prices, it is necessary to spend less raw materials and other resources on the production of one unit of output. Such changes are possible only through the introduction of new technologies and other processes that can reduce the cost of doing business.
In Russia, markets that are close to perfect competition are not developing fast enough
If we talk about the domestic market, perfect competition in Russia, examples of which are found in almost all areas of small business, is developing at an average pace, but it could be better. The main problem is the weak support of the state, since so far many laws are focused on supporting large manufacturers, which are often monopolists. In the meantime, the small business sector remains without much attention and the necessary funding.
Perfect competition, examples of which are given above, is an ideal form of competition on the part of understanding the criteria for pricing, supply and demand. To date, no economy in the world can find a market that would meet all the requirements that must be observed under perfect competition.
6.2. Perfect competition. Equilibrium in the short and long run
A perfectly competitive market has the following characteristics:
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 not able to influence the market price of the goods produced by the industry.
2. Firms in the industry produce the same (homogeneous) product, therefore, it is absolutely indifferent for buyers which product of which firm to purchase.
3. The industry is open to entry and exit of any number of firms. No firm in the industry is undertaking any opposition, as there are no legal restrictions on this process.
individual firm demand. Since, under conditions of perfect competition, a firm in an industry, within the limits of changes in its output, does not significantly affect the price of a product and sells any quantity of a product 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 a product sold will add to the firm's total revenue the same amount of marginal revenue equal to the price of the product.
Therefore, for an individual firm operating in a perfectly competitive market, the average and marginal revenues are equal to the price of goods P, i.e. MR \u003d AR \u003d P, so the demand curves, average and marginal revenues coincide and represent the same horizontal line drawn at the level of the price of the goods.
Equilibrium in the short and long run
According to rules 1 and 2 (see Topic 6.1), acting 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, the marginal revenue MR is equal to the average revenue AR and the price of the good, i.e. MR=AR=P.
So, operating in a perfectly competitive market, the firm maximizes profit if it produces such a volume q of goods at which marginal cost equals the price of the good, set by the market regardless of the actions of the firm.
This situation is shown in Fig. 13.
Rice. 13. Equilibrium in the short run
By producing Qe units of a good when MC = P, the firm maximizes its profit, and any deviation from this quantity reduces its profit. If the firm will produce 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 the price and the firm needs to reduce output.
Note that at point E1, marginal cost MR is also equal to the price of good P, but at point E (and not E1) price P exceeds average variable costs AVC, i.e. rule 1 is satisfied. Hence, it is at point E, and not E1, that the firm has an equilibrium in the short run.
Supply curve in the short run. The market price of the item. Suppose that the initial price P under the influence of the market has increased to P e1 . As has just been shown, under these conditions, the firm will increase output to such a level Q e1 when the marginal cost is again equal to 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 cost at any values of Q, then the points of the MC curve and will determine the volume of production at all values of the price, when MC \u003d P. In addition, according to rule 1, if the price of a product drops below AVC, then the firm will stop existence and Q = 0. But, as you know, the curve showing the ratio of the price of goods to the number of units of goods offered by the firm for sale is the supply curve.
This leads to an important conclusion: The supply curve of a perfectly competitive firm in the short run is the segment of the marginal cost curve above the AVC curve.(segment VK in Fig. 13).
If there are N firms in the industry, then supply curves can be constructed in a similar way for each of them. Then An industry supply curve can be obtained by horizontally summing the supply curves of individual firms.
The market price of a good under perfect competition is determined by the intersection of the industry's supply curve and the market demand curve. Although each firm in an industry does not significantly affect the market for a product, the collective actions of all firms in the industry (as reflected in the industry supply curve), as well as collective actions of households (as reflected in the market demand curve) can lead to shifts in supply and demand curves and a change in the equilibrium price . But at the new equilibrium price, each firm will strive to produce so many units of the homogeneous good that MC = P. With these outputs, the QS of the industry equals the market QD, and equilibrium occurs in the industry.
However, the amount of profit received is of great importance for the company. The firm makes a profit if the revenue per unit of output, i.e. AR, exceeds unit costs, i.e. ATS. But since AR=P, then this is equivalent to saying that the firm earns an economic profit whenever the market price of a good exceeds the average total cost, i.e. When P > ATS. So, depending on the value of the market price of the goods, three options are possible.
1. The price of goods is below the average total cost at the volume of production q when MC = P; in this case, the firm will have losses (Fig. 14a).
2. When the volume of production q, the price of the goods coincides with the value of the average total cost and the economic profit is equal to zero. The value of output in this case reflects the so-called break-even point (Fig. 14b). The level of instability is observed when the total costs are equal to the total revenue TC = TR or when marginal and average costs are equal (MC = ATC).
3. The price of the good is higher than the average total cost of producing q units of the good; in this case, the firm will have a profit (Fig. 14 c).
Rice. 14. Possible options for equilibrium in the short run
Therefore, the firm, forecasting its activities, must determine the production volumes at which the minimum values of ATC and AVC are achieved. They will serve as a benchmark for the behavior of the company in a given market structure, allowing you to find the break-even level and the moment of termination of production.
Equilibrium in the long run
Over the long run, firms can adjust to various market changes. For a long run in a perfectly competitive market, the following conditions are characteristic:
1. Operating firms make the most efficient use of available capital equipment. This means that each firm in the industry, in all short-run periods, which together form the long run, maximizes profit by producing such a volume of output when MS = R.
2. There are no incentives for firms in other industries to enter the industry. In other words, all firms in the industry have an output corresponding to the minimum of average total costs in each short run 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 output and make a profit by expanding the scale of production. This is equivalent to the condition under which each firm in the industry produces a volume of output q * corresponding to the minimum of average total costs in the long run, where the LATC curve has a minimum.
It is important to note that since under perfect competition firms are free to enter and exit the industry, in long run equilibrium each firm will have zero economic profit.
(Materials are given on the basis of: V.F. Maksimova, L.V. Goryainova. Microeconomics. Educational and methodological complex. - M.: Publishing Center of the EAOI, 2008. ISBN 978-5-374-00064-1)
The perfect competition market model is based on four basic conditions (Figure 7.1).
Let's consider them sequentially.
In order for competition to be perfect, the goods offered by firms must meet the condition of product homogeneity. This means that the products of firms in the view of buyers are homogeneous and indistinguishable, i.e. products of different enterprises are completely interchangeable1 (they are complete substitute goods).
Under these conditions, no buyer would be willing to pay a hypothetical firm more than he would pay its competitors. After all, the goods are the same, customers do not care which company they buy from, and they, of course, opt for the cheapest. That is, the condition of product homogeneity actually means that the difference in prices is the only reason why the buyer can prefer one seller to another.
P
Small size and multiplicity market entities
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 that the decision to increase or decrease their volumes creates neither surpluses nor deficits. The aggregate size of supply and demand simply "does not notice" such small changes. So, if one of the countless beer stalls in Moscow closes, the capital's beer market will not become one iota more scarce, just as there will not be a surplus of the drink beloved by the people if one more “point” appears in addition to the existing ones.
These restrictions (homogeneity of products, large number and small size of the enterprise) actually predetermine that, under perfect competition, market entities are not able to influence prices.
WITH
The inability to dictate the price to the market
Market entities under conditions of perfect competition can influence the general situation only when they act in agreement. That is, when some external conditions encourage all sellers (or all buyers) of the industry to make the same decisions. In 1998, the Russians experienced this first hand, when in the first days after the devaluation of the ruble, all grocery stores, without agreeing, but equally understanding the situation, unanimously began to raise prices for goods of a “crisis” assortment - sugar, salt, flour, etc. Although the increase in prices was not economically justified (these goods rose in price much more than the ruble depreciated), the sellers managed to impose their will on the market precisely as a result of the unity of their position.
And this is not a special case. The difference in the consequences of a change in supply (or demand) by one firm and by the entire industry as a whole plays into the functioning of a perfectly competitive market.
big role.
WITH
No Barriers
In our time, similar processes are taking place in the criminalized areas of business, which - alas - can be observed in many markets of large Russian cities. All sellers follow well-known unofficial rules (in particular, they keep prices not below a certain level). Any outsider who decides to bring down prices, and simply trade "without permission", has to deal with bandits. And when, say, the Moscow government sends disguised workers to the market to sell cheap fruit,
police officers (the goal is to force the criminal “owners” of the market to show themselves and then arrest them), then it is fighting precisely for the removal of barriers to entry into the market.
On the contrary, the absence of barriers typical of perfect competition or the freedom to enter the market (industry) and so far to give it means that resources are completely mobile and move without problems from one activity to another. Buyers freely change their preferences when choosing goods, and sellers easily switch production to more profitable products.
There are no difficulties with the termination of operations in the market. Conditions do not force anyone to stay in an 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.
P
Perfect Information
7.1.2. Significance of the perfect competition model
IN
Abstraction concept of perfect competition
P
The value of the concept of perfect competition
1. The model of a perfectly competitive market allows us to judge the principles of functioning of very many small firms, about
that give standardized homogeneous products, and, therefore, operate in conditions close to perfect competition.
2. It is of great methodological importance, since it allows - albeit at the cost of large simplifications of the real market picture - to understand the logic of the company's actions. This technique, by the way, is typical for many sciences. So, in physics, a number of concepts are used (ideal gas, absolutely black body, ideal engine), built on assumptions (no friction, heat losses, etc.), which are never completely fulfilled in the real world, but serve as convenient models for his descriptions.
The methodological value of the concept of perfect competition will be fully revealed later (see topics 8, 9 and 10), when considering the markets of monopolistic competition, oligopoly and monopoly, which are widespread in the real economy. Now it is expedient to dwell on the practical significance of the theory of perfect competition.
What conditions can be considered close to a perfectly competitive market? Generally speaking, there are different answers to this question. We will approach it from the position of the firm, that is, we will find out in what cases the firm in practice acts as (or almost so) as if it were surrounded by a market of perfect competition.
R
criteria for perfect competition
Obviously, under such conditions, the demand curve for the firm's products will look like a horizontal line (Fig. 7.2). Whether the firm produces 10 units, 20 or 1, the market will absorb them at the same price P.
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.
The presence of perfectly elastic demand for the firm's products is called the criterion of perfect competition. As soon as such a 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 firm to operate in the market, in particular, determines the patterns of income.
D
Average, ultimate and total income
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 - the price of the goods and that marginal income is always at the same level. So, if the price of a loaf of bread established in the market is 3 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 3 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 revenue.
As for the total income (total revenue) of the enterprise, it changes in proportion to the change in output
And in the same direction (see Figure 7.2). That is, there is a direct, linear relationship:
If the stall in our example sold 100 loaves of 3 rubles, then its revenue, of course, will be 300 rubles.
Graphically, the curve of total (gross) income is a ray drawn through the origin with a slope:
tga= ∆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.
At
Small business and perfect competition
The fact is that most of the new businessmen started their business literally from scratch: no one in the USSR had large capitals. Therefore, small business has embraced even those areas that in other countries are controlled by big capital. Nowhere in the world do small firms play a significant role in export-import transactions. In our country, many categories of consumer goods are imported mainly by millions of shuttles, i.e. not even just small, but the smallest enterprises. In the same way, only in Russia, “wild” brigades are actively engaged in construction for private individuals and renovation of apartments - the smallest firms, often operating without any registration. A specifically Russian phenomenon is also “small wholesale trade” - this term is even difficult to translate into many languages. In German, for example, wholesale is called "large trade" - Grosshandel, since it is usually carried out on a large scale. Therefore, the Russian phrase "small wholesale trade" is often conveyed by German newspapers with the absurd-sounding term "small-scale trade".
Shuttle shops selling Chinese sneakers; and atelier, photography, hairdressing; vendors offering the same brands of cigarettes and vodka at metro stations and auto repair shops; typists and translators; apartment renovation specialists and peasants trading in collective farm markets - all of them are united by the approximate similarity of the product offered, the insignificant scale of the business compared to the size of the market, the large number of sellers, that is, many of the conditions for perfect competition. Mandatory, for them and the need to take
prevailing market price. The criterion of perfect competition in the sphere of small business in Russia is fulfilled quite often. In general, albeit with some exaggeration, Russia can be called a country-reserve of perfect competition. In any case, conditions close to it exist in many sectors of the economy where new private business (rather than privatized enterprises) predominates.
Perfect (pure) competition is a market model in which many sellers and buyers interact. At the same time, all subjects of market relations have equal rights and opportunities.Imagine that there is a market for rye flour. It interacts with sellers (5 firms) and buyers. The rye flour market is designed in such a way that a new participant offering his products can easily enter it. In this market model, there is perfect (pure) competition.
A distinctive feature of the market of pure competition is that the seller and the buyer cannot influence the price of the goods. The price of a product is determined by the market.
In order for the same product to have the same price from different sellers in the same period of time, the following conditions must be met:
1. Homogeneity of the market;
2. Unlimited number of sellers and buyers of the product;
3. No monopoly (one influential manufacturer that captured the lion's share of the market) and monopsony (the only buyer of the product);
4. Prices for goods are set by the market, and not by the state or interested persons;
5. Equal opportunities for conducting economic and economic activities for all members of the society;
6. Open information about the main economic indicators of all market players. It is about the demand, supply and prices of the product. In a market of pure competition, all indicators are considered fairly;
7. Mobile factors of production;
8. The impossibility of a situation where one market entity influences the rest by non-economic methods.
If these conditions are met, perfect competition is established in the market. Another thing is that in practice this does not happen. Let's look at why next.
Pure competition - abstraction or reality?
There is no perfect competition in real life. Any market consists of living people who pursue their own interests and have leverage over the process.
There are three main barriers that prevent a new firm from simply entering the market:
Economic. Trademarks, brands, patents and licenses. Organizations that have been on the market for a long time are sure to patent their product. This is done so that newcomers cannot simply copy the product and start a successful trade;
Bureaucratic. With any number of approximately equal producers, a dominant firm always stands out. It is she who has the power in the market and sets the price of the product;
Mergers and acquisitions. Large enterprises buy up new, developing firms. This is done to introduce new technologies and expand the range of the enterprise under one brand. An effective way to compete with successful newcomers.
Economic and bureaucratic obstacles greatly increase the costs for newcomers to enter the market.
Business leaders ask themselves questions:
1. Will the income from the sale of products cover the costs of promotion and development?
2. Will my business be profitable?
The purpose of barriers to entry is to prevent new businesses from gaining a foothold in the market. Theoretically, any enterprise can become a new monopolist. There have been such cases in history. Another thing is that in percentage terms it will be 1-2% of 100% of new enterprises.
Markets close to pure competition
If pure competition is an abstraction, why is it needed? An economic model is needed in order to study the laws of the market and more complex types of competition.
Perfect competition plays a very important role in the economy:
1. Almost perfect competition emerges in some markets. This includes agriculture, securities and precious metals. Knowing the model of perfect competition, it is quite easy to predict the fate of a new firm.
2. Pure competition is a simple economic model. It allows comparison with other types of competition.
Perfect competition, like other types of rivalry between economic entities, is an integral part of market relations.
Conditions for perfect competition
Competition is one of the main conditions for the development of a market economy. According to leading economists, there are several conditions for perfect competition, under which it is possible to significantly accelerate the development of the economy. It is obvious that the creation of perfect competition in the real market is practically impossible, but it is simply necessary to strive to create conditions for ideal competition.In accordance with the most common definition, perfect competition is a market condition in which a large number of producers and buyers of a product operate on the market, while none of them can dictate the conditions for buying or selling a particular product. It is assumed that both the buyer and the seller have complete information about the product, as well as about the prices for this product in other regions, in addition, the price of the product is fair, i.e., it is set using the supply and demand function.
Currently, there are five main features of perfect competition: the homogeneity of goods on the market, free pricing for all types of goods, the absence of entry and exit barriers for a particular industry, as well as the absence of restrictions on the number of market participants and pressure on producers and buyers. goods and services.
It is obvious that such a state of affairs is practically impossible. Most goods that enter the market are subject to taxes, and some goods are subject to additional excises, which, for example, makes it possible to contain the growth in the production and consumption of alcohol and tobacco.
Many manufacturers of goods choose to use both market and non-market methods to capture the majority of the market. In some cases, a new company that seeks to capture the market offers a quality product at low prices, in other cases it uses administrative resources to fight competitors or promote its products on the market.
One of the main problems that prevents the creation of conditions for perfect competition is the use of various advertising technologies, thanks to which consumers are presented with an “ideal” product, most of the negative properties of which are hushed up. In addition, many manufacturers of goods or services use various methods of industrial espionage, as well as copying the best samples of competitors' products and artificially increase production costs.
Moreover, almost any manufacturer tries to take a monopoly position, which allows them to dictate prices and sales volumes in the market. To improve the conditions for competition, the state should take antimonopoly measures to create conditions close to perfect competition.
Perfect competition firm
The market price of a perfectly competitive market is determined on the basis of market equilibrium. The demand for a product is perfectly elastic and is determined by the market price of the product.The firm will maximize profits when price is greater than average total cost. The firm is self-sustaining if the price matches the total average cost. The firm minimizes losses under conditions when the price is less than the average general, but more than the average variables. The firm stops production when the price is less than average total or average total and less than average variable cost. Losses in this case are the amount of fixed costs.
The line showing the quantity of output a firm offers at each price level is called the firm's supply curve.
A firm's supply curve is the portion of its marginal cost curve above the average variable cost.
The supply curve of a perfectly competitive firm in the short run depends on the following factors:
Number of firms in the industry;
- size of firms;
- applied technology.
In the conditions of perfect competition, to ensure the long-term equilibrium of the firm, it is necessary:
1) the firm should not have incentives to increase or decrease production;
2) the firm must be satisfied with the amount of used capacity and fixed costs that will provide it with the minimum average total and long-term average total costs;
3) there should be no incentives for new firms to enter or leave the industry, i.e. the absence of economic profit, the equality of average total and long-term average total in price is necessary.
The supply of a perfectly competitive industry in the short run is the total output of all firms. The short-run market supply curve of a perfectly competitive industry is the sum of the short-run supply curves of the individual firms.
The position of the industry's long-run supply curve will depend on the extent to which a change in the industry's output will affect the prices of the factors of production used by the industry. Depending on the nature of this influence, industries with constant, growing and declining costs are distinguished.
If the increased demand for products does not lead to an increase in the price of resources, then a new long-term equilibrium of the industry will be established at price P and volume Q.
The industry supply curve is a horizontal line. This is a fixed cost industry. It is characterized by: prices are unchanged when supply changes, the price is equal to long-term average costs.
A rational distribution of resources is achieved when their distribution between industries ensures the production of an optimal set of goods in terms of quantity and structure. The most efficient allocation of resources is achieved when the marginal cost of production is equal to the market price, because. the value of the last unit of output for the buyer will be equal to the value of the resources necessary for its production. Efficient use of resources is achieved when the production of goods is carried out at the lowest cost.
This means that the level of long-term average costs should be taken as indicators of the efficiency of the resources used, i.e. in perfectly competitive markets, firms always offer in accordance with the MC=P principle, and in conditions of long-term equilibrium P=LMC+LATC, i.e. A perfectly competitive market is efficient because the market forces acting on it ensure the allocation of resources and force firms to use them rationally.
The price of perfect competition
Pricing policy essentially depends on what type of market the product is being promoted on. There are four types of markets, each with its own pricing problems: perfect competition, monopolistic competition, oligopoly, and pure monopoly. In this paper, we will focus on perfect competition in detail.Perfect competition is a competitive market structure in which many relatively small, independent manufacturers (sellers) offer a standard product that is bought by many buyers.
Since the product is standard, the buyer does not care which of the sellers to buy it from. Therefore, there is no basis for price competition in such a market.
An industry is open to entry and exit by any number of firms. No firm in the industry is undertaking any opposition, as there are no legal restrictions on this process.
Features of a perfectly competitive market:
1) a large number of sellers and buyers of goods;
2) product uniformity;
3) absolute mobility of the movement of resources, the absence of barriers to entry into the industry and exit from it;
4) no economic agent has power over prices;
5) full awareness of participants about prices and production conditions.
Dignity:
Helps to allocate resources in such a way as to achieve maximum satisfaction of needs;
- forces firms to produce products at the lowest average cost and sell it for a price corresponding to these costs.
Flaws:
Does not provide for the production of public goods (by the piece);
- not always able to provide the concentration of resources necessary to accelerate the scientific and technological progress;
- contributes to the unification and standardization of products (ie does not take into account a wide range of consumer choice).
If a firm operates in conditions of perfect competition, then it sells each unit of a product at the same market price. This means that each additional unit of a product sold will add to the firm's total revenue the same amount of marginal revenue equal to the price of the product. Therefore, for an individual firm operating in a perfectly competitive market, the average and marginal revenues are the same and represent the same horizontal line drawn at the level of the price of the goods. Under perfect competition, the firm is so small compared to the market as an integral system that its decisions have little or no effect on the market price. The equilibrium between supply and demand that has developed under a single system will not change if an individual firm increases (decreases) the amount of output. Since each seller has the opportunity to sell at the current price any volume of production he wants, he has no reason to reduce the price.
The main problem of a perfectly competitive firm is to find the output that maximizes profits when the demand for its products is perfectly elastic.
Defining the main advantages of a perfectly competitive market model, one should pay attention to its weaknesses.
In a competitive market system, there are no motives for the optimal distribution of income. By allocating resources, the competitive model does not allow for spillover costs and benefits or the production of public goods. An industry with pure competition can hinder the application of the best production techniques and contribute to a slow pace of technological progress. A perfectly competitive system provides neither a wide range of product choices nor the conditions for new product development.
In a perfectly competitive market, there are many firms, each with a small share of the market, and none of them can have a significant impact on the level of current prices. The market is characterized by the homogeneity and interchangeability of competing products, the absence of price restrictions.
For a firm under these conditions, demand is fully elastic with price. When expanding the volume of production (sales) of a product, the firm, as a rule, does not change its price. The relationship between demand and price is inversely proportional. A decrease in price leads to an increase in demand. If the increase in supply in an industry increases, then the price will fall in all firms, regardless of their volume of production. Thus, no single firm in a perfectly competitive market plays a significant role in pricing.
The price is formed under the influence of supply and demand. The firm is guided by the prevailing price level. However, even under these conditions, the firm, taking advantage of the market situation, can significantly increase the price, and then, gradually reducing it to the level of ordinary prices, in a short period to achieve an increase in its income. There are a lot of markets for perfect (free, pure) competition, especially in the trade in consumer goods. Such markets also include international markets for agricultural products, goods and personal consumption products.
The cost of perfect competition
This type of market structure is characterized by:The presence in the market of a significant number of sellers and buyers;
- an insignificant share of the volume of supply from an individual seller, which does not allow him to influence the market price (in conditions of perfect competition, an individual firm acts as a price recipient);
- sale by all sellers of homogeneous, standard, unified products;
- the same information about the state of affairs in the market for all market participants (sellers and buyers);
- mobility of all resources, which implies freedom of entry into the industry and exit from it.
A market that meets all these conditions is called a "perfect" or "free" market. In such a market, sellers cannot influence the market situation and must adapt to it. The inability to influence the price forces competing firms to maintain or improve their position in the market to reduce production costs, improve product quality, use other non-price methods of competition.
Perfect competition was characteristic of a market economy in the middle of the 19th century. However, competition objectively leads to the concentration of production and capital in large enterprises and the emergence of monopolies that destroy competition.
In modern conditions, perfect competition is the exception rather than the rule. Today, the markets of agricultural products, securities, currency, etc. are closest to the markets of perfect competition.
The behavior of a firm in a competitive market is determined by the general rule of production optimization that maximizes profit. This rule is that through output, profit increases only if the income from sales of an additional unit of output exceeds the cost of producing this unit, i.e. if marginal revenue (MR) is greater than marginal cost (MC).
On the contrary, when the costs associated with the release of another unit of production are higher than the income brought by its sale (MR
Obviously, under these conditions, the maximum profit will be achieved at the volume of production when the marginal cost is equal to the marginal revenue.
The firm will maximize profit by maintaining output at a level where marginal revenue equals marginal cost, provided that the price of output is greater than average total cost.
MR = MC (P > ATC)
1. If at the optimal production volume Qmax, P=MC>ATC, then the firm will receive economic profit
2. With optimal production MC=P=ATC, the firm will receive zero economic profit, i.e. operates in self-sustaining mode.
3. If P=MC 4. If P=MC 5. In the long run, the maximum profit is achieved by the firm, the firm receives normal profit and zero economic profit, which is associated with the stabilization of output in the industry.
This rule is true not only for conditions of perfect competition, but also for other types of market.
The supply curve of a competitive firm focused on maximizing profits coincides in the short run with the ascending part of the marginal cost curve, which lies above the minimum point of average variable costs.
Each individual firm can either make economic profits, or incur losses, or operate at the level of self-sufficiency (receive normal accounting profit). The firm will compare marginal revenue with marginal cost and scale up production until marginal revenue equals marginal cost. The quantity of production at which this equality is ensured, the firm will offer on the market.
The firm may also face a loss situation, for example, when the market price decreases. If, for some reason, the market price of a product has fallen and fallen below the minimum of the average gross cost, then the firm will continue to produce in an amount that allows it to fully compensate for average variable costs and partially compensate for fixed costs, waiting for a more favorable market situation. If the market price is below the level of variable costs, then the firm will not be able to compensate for its costs and will be forced to stop production.
Perfect market competition
In the manufacturing sector, competition is a struggle between producers of goods (sellers) for markets for goods, for consumers in order to obtain higher incomes, profits or other benefits.In economic theory, competition is divided into two types: perfect competition and imperfect competition. Imperfect competition, in turn, is divided into three types of market structures: monopoly, oligopoly and monopolistic competition. They differ among themselves in the number of firms entering the industry, in the nature of their products, in the degree of power over price, in the number of entry barriers to entry into the industry and the difficulty of overcoming them.
There are two extreme market situations: pure monopoly and its opposite, perfect competition. A pure monopoly is characterized by the presence of a single seller of a product that has no substitutes, the absence of product differentiation, almost insurmountable barriers to entry into the industry, and the ability to influence the price. In conditions of perfect competition in the industry there are a large number of producers (sellers) of a homogeneous product, while there are no barriers to entry into the industry. The firm - a perfect competitor has no power over the price, it is a "price taker".
Both situations described above do not take place in reality, these are the so-called "theoretical abstractions". However, they help to find and more accurately define the main differences between perfect and imperfect competition, to understand the behavior of a company seeking to maximize profits in each of these situations.
A perfectly competitive market is characterized by:
A very large number of small producers or sellers of goods;
- standardized, homogeneous products;
- the inability of individual sellers to influence the price;
- unhindered entry and exit of the firm from the industry;
- no need to conduct a non-price struggle;
- freedom of flow of resources between industries;
- availability of complete information about the market for all participants in market relations.
Now it is worth dwelling in more detail on each of the above points:
1) The presence of a large number of firms in perfect competition implies that the share of each individual firm is very small compared to the total market. Indeed, if the share of one firm is relatively larger than the shares of others, then this firm will dominate the market. Consequently, this will lead to the restriction of competition or even to its elimination.
2) Products in the perfectly competitive market are standardized, or homogeneous. This means that the consumer does not care which seller's product he buys. It is the lack of product differentiation that is the main difference between the market of perfect competition and the market of monopolistic competition, where the buyer compares the quality of goods produced by different firms.
3) A perfectly competitive firm produces such a small fraction of the industry's total output that fluctuations in the level of its output do not affect the total supply, and hence the price of the product. Thus, producers in a perfectly competitive market have no power over price: they have to sell the product at the price established in the market. That is why firms operating in conditions of perfect competition are called "price takers" (from the English price takers). If the manufacturer raises the price by at least the minimum value, consumers will stop buying his product and will buy the same (in quality and other parameters) product from his competitors at a lower price. Reducing prices is also economically irrational, since the firm can sell all its products at the price established in the market.
4) In a perfectly competitive market, there are no barriers to entry of new or exit of existing firms. This condition ensures that no firm can dominate the market and interfere with the activities of other firms. This condition also allows us to conclude that the number of firms in a perfectly competitive industry will remain large, despite possible small quantitative changes.
5) Conducting non-price struggle (by such methods as advertising, after-sales service, providing a guarantee for goods, etc.) is not necessary in a perfectly competitive environment, since the company can already sell all its products at the market price, and incurring additional expenses will only increase the costs of the company, without bringing any benefits and making the business unprofitable. It is worth noting, however, that the application of non-price struggle methods for the industry as a whole can be beneficial.
6) Under conditions of perfect competition, each firm has access to any amount of resources it needs in production, and resources can freely “flow” from one production to another.
7) Buyers and sellers in conditions of perfect competition have complete information about market conditions. Buyers are aware of the prices charged for a given product by various sellers. Sellers, in turn, are aware of the prices set for this product by competitors. As a result of this awareness, all sellers charge the same price for goods from all buyers.
Perfect competition products
The presence in 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.Trade is carried out in a standardized product (eg 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 the products of another manufacturer.
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 agree with the price dictated by the market.
Lack of non-price competition, which is associated with the homogeneous nature of the products sold.
Buyers are well informed about prices; if one of the producers raises the price of their products, they will lose buyers.
Sellers are not able to collude on prices, due to the large number of firms in this market.
Free entry and exit from the industry, i.e., there are no entry barriers blocking entry into this market. In a perfectly competitive market, it is not difficult to create a new firm, and there is no problem if an individual firm decides to leave the industry (because firms are small, there is always an opportunity to sell a business).
For your information. 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.
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.
Perfect and imperfect competition
Competition is an economic process aimed at the interaction, interconnection and struggle between enterprises operating on the market in order to ensure all opportunities for marketing their own products, as well as meeting the needs of consumers.In the specialized literature, the following functions are distinguished that competition performs:
Establishment or identification of any product;
equalization of cost with the distribution of profits, depending on the labor costs for production;
regulation of the distribution of financial resources between industries and industries.
There are various classifications of this economic indicator. For example, perfect and imperfect competition. Let us dwell in this article in more detail on some types in more detail.
Within this classification, the following types should be distinguished:
Individual, in which one participant seeks to take a certain place in the market to select the best conditions for the sale of services and goods;
local, determined among sellers in one territory;
sectoral (within one industry there is a struggle for maximum income);
intersectoral, expressed in the rivalry of sellers of various industries in the market for additional attraction of buyers to obtain a large income;
national, represented by the competition of commodity owners within one state;
global, defined as the struggle of business entities and various countries within the global market.
Types of competition in the context of the nature of development
According to the nature of development, this economic indicator is divided into regulated and free. Also in the economic literature, you can find the following types of competition: price and non-price.
Thus, price competition can arise by artificially lowering prices for specific products. At the same time, price discrimination is widely used, which occurs when the specified product is sold at different prices that are not justified in terms of costs.
This type of competition is most often used in the transportation of goods or products (often it is the transportation of non-durable goods from one outlet to another), as well as in the service sector.
Non-price competition manifests itself mainly due to the improvement of product quality, production technologies, nanotechnologies and innovations, as well as patenting the terms of sale. This type of competition is based on the desire to capture a part of the market of a certain industry through the release of completely new products that are fundamentally different from analogues or by upgrading the previous model.
Characteristics of perfect and imperfect competition
This classification takes place depending on the competitive equilibrium in the market. Thus, perfect competition is based on the fulfillment of any equilibrium prerequisites. These may include: many independent consumers and producers, free trade in production factors, independence of economic entities, comparability and homogeneity of finished products, as well as the availability of available information about the state of the market.
Imperfect competition is based on the violation of any prerequisites for equilibrium. This competition is characterized by the following properties: distribution of the market among large enterprises with limited independence, differentiation of finished products and control of market segments.
Advantages and disadvantages of competition
Perfect and imperfect competition have their advantages and disadvantages.
So, based on the definition of perfect competition, which shows the state of the market, where there are producers and consumers that do not affect the market price, which means that there is no reduction in demand for products with an increase in sales volumes, the advantages include:
Facilitating the achievement of compliance with the interests of market participants by using a balanced supply and demand, achieving an equilibrium price and volume;
ensuring efficient allocation of limited resources in accordance with the information on the pledged price;
orientation of the manufacturer to the buyer - to achieve the main goal to meet some of the economic needs of the citizen.
Thus, perfect and imperfect competition contribute to the achievement of an optimal and competitive state of the market, in which there is no profit or loss.
With these advantages, there are some disadvantages of these types of competition:
The presence of equality of opportunity while maintaining inequality of outcome;
benefits that are not subject to division and individual evaluation in a competitive environment are not produced;
lack of consideration for the different tastes of consumers.
Perfect and imperfect competition provide insight into how the market mechanism works, but are actually quite rare. The second type of competition determines the influence of producers and consumers on the price and its changes. At the same time, the volume of finished products and access of manufacturers to this market has some limitations.
There are the following conditions in which there are some types of competition (perfect and imperfect):
In a functioning market, only a limited number of producers should operate;
there are economic conditions in the form of barriers, natural monopolies, taxes and licenses for penetration into a particular production;
The market of perfect and imperfect competition in information is characterized by some distortions and is biased.
These factors can contribute to the disruption of any market equilibrium due to the limited number of producers, which sets and subsequently maintains fairly high prices in order to obtain high monopolistic profits. In practice, you can meet the following types of competition (perfect and imperfect including): oligopoly, monopoly and monopolistic competition.
Classification of competition according to the demand and supply of goods or services
Within the framework of this classification, perfect and imperfect market competition take the following forms: oligopolistic, pure and monopolistic.
Considering the above in more detail, it can be noted that oligopolistic competition, in general, can refer to an imperfect form. The following are accepted as key characteristics of a functioning market: a small number of competitors that have a fairly strong relationship; significant market power (the so-called reactive position and measured by the elasticity of the enterprise's response to some behavior of competitors); limited number with the similarity of goods.
The conditions of perfect and imperfect competition are manifested for such industries as: the chemical industry (production of rubber, polyethylene, technical oils and certain types of resins), machine-building and metalworking industries.
Pure competition is the kind that can be classified as perfect competition. The key characteristics of this market are as follows: a significant number of both sellers and buyers without sufficient power to influence prices; undifferentiated (interchangeable) goods sold at prices that are determined by comparing supply and demand, as well as the absence of a kind of market power.
Market structures (perfect and imperfect competition) are widely used in industries that produce consumer goods: food and light industries, as well as the manufacture of household appliances.
There is another type of competition - monopolistic. Its main characteristics include: a large number of competitors with a balance of their forces; the differentiation of goods, expressed by the buyer's consideration of goods in terms of their possession of distinctive features perceived by the market.
Types of market competition (perfect and imperfect) with the help of differentiation convey the following forms: a special technical characteristic, the taste of a drink, a combination of various characteristics. We should not forget about the increase in market power due to the differentiation of goods, which will protect the business entity and make a profit above the average market.
Market classification
The model of perfect and imperfect competition assumes the existence of competitive and non-competitive markets.
As criteria for the difference between these markets, it is customary to consider the main features that are characteristic to some extent of the models:
The number of enterprises in a particular industry with their sizes;
production of goods: of the same type (standardized) or heterogeneous (differentiated);
ease of entry into a particular industry or the exit of an enterprise from it;
availability of market information to companies.
The market of perfect and imperfect competition has the following features:
The presence of a certain number of buyers and sellers for a particular type of product, while each of them can produce (buy) only a small share of the total market volume;
homogeneity of goods from the point of view of buyers;
the absence of entry barriers for entry into the industry of a newly formed manufacturer, as well as free exit from it;
availability of complete information for all market participants (for example, buyers are aware of prices);
rationality in the behavior of market participants who pursue personal interests.
A firm under perfect and imperfect competition
The behavior of an enterprise depends not so much on time as on the type of competition. Considering the rational behavior of the company in conditions of perfect competition, it is necessary to note the following. The goal of any business entity is to maximize profits obtained by increasing the gap between price and costs. In this case, the price should be set under the influence of supply and demand in the market. If the company significantly increases the price of its own finished products, it may lose buyers who purchase similar products from a competitor. And the sales of the specified economic entity may decrease significantly. As for the costs, in this case their value is determined by the technologies used by the enterprise.
Thus, any business entity faces the question of determining the quantity of produced and sold products in order to obtain maximum profit. Therefore, the company has to constantly compare the market price of products and the marginal cost of its manufacture.
An enterprise in conditions of imperfect competition
To achieve the rationality of the enterprise's behavior in the presence of imperfect competition in the market, the following conditions must be met.
In contrast to the above example, under conditions of imperfect competition, the manufacturer can already influence the price of his own products. If, in the conditions of functioning in a market of perfect competition, the income from the sale of products does not contain any changes (equals to the market price), then in the presence of imperfect competition, sales growth can reduce the price, which leads to a decrease in additional income.
In addition to maximizing profits, there are other types of motivation for the activities of the enterprise:
At the same time, consider an increase in sales;
achievement by the enterprise of a certain level of profit, and then it is already possible not to make any efforts to maximize it.
Summing up the material presented in this article, it is necessary to note the following. The development of competition between manufacturers leads to the separation of large stable companies, with which it is already difficult for other manufacturers to “compete”. Before each newly created manufacturer who wants to take a certain place in a particular industry or market, there may be quite complex barriers. In this case, we are talking about the availability of the necessary financial resources. There are also some administrative barriers that provide for rather stringent requirements for "newcomers" to the market.
Features of perfect competition
Perfect competition is a theoretical model of a certain ideal market, on which numerous economic agents operate, strictly rationally pursuing their own selfish interests (them and only them) and not having any restrictions in their activities. Essentially, this model explains how a market without central planning or any other form of conscious coordination between producers and consumers solves the basic problems of the firm, industry and the economy as a whole. That is why some scholars prefer to call the model of perfect competition the model of complete decentralization.In order for competition to be perfect, the goods offered by firms must meet the condition of product homogeneity. This means that the products of firms in the view of buyers are homogeneous and indistinguishable, i.e. products of different firms are completely interchangeable (they are complete substitute goods).
Under these conditions, no buyer would be willing to pay a hypothetical firm more than he would pay its competitors. After all, the goods are the same, customers do not care which company they buy from, and they, of course, opt for the cheapest. That is, the condition of product homogeneity actually means that the difference in prices is the only reason why the buyer can prefer one seller to another.
Further, under perfect competition, neither sellers nor buyers influence the market situation due to the smallness and multiplicity of all market participants. Sometimes both of these sides 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.
And just as the Brownian motion of an individual atom does not affect the shape of a water drop, the actions of an individual firm under perfect competition do not affect the market situation in the industry. The volume of purchases made by the consumer (or the seller of sales) is so small compared to the total volume of the market that the decision to increase or decrease this volume does not create either a surplus or a shortage. The aggregate size of supply and demand simply "does not notice" such small changes.
All of the above restrictions (homogeneity of products, the large number and small size of the firm) actually predetermine the fact that under perfect competition the subjects 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.
Indeed, it is difficult to imagine that one seller of potatoes on the "collective farm" market will be able to impose on buyers a higher price for his product, if other conditions of perfect competition are observed. Namely, if there are many sellers, and their potatoes are exactly the same.
Therefore, it is often said that under perfect competition, each individual seller "receives the price" prevailing in the market.
Barriers to market entry are defined as any competitive advantage that firms already in the industry have over those entering the industry. The most typical entry barriers are the large initial capital required to open a business, the uniqueness of the product or technology used, and legal restrictions. Exit barriers are the losses that are inevitable when trying to take a business out of a given industry and move it to another. Most often, the exit barrier is high sunk costs, i.e. the need to sell the company's property that has become unnecessary for next to nothing.
The condition for perfect competition is the absence of barriers to entry and exit from the market. The fact is that 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.
Most typical of perfect competition, the absence of barriers, or the freedom to enter and leave the market (industry), means that resources are completely mobile and move seamlessly from one production 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. All this is very attractive to many entrepreneurs, despite the fact that many of them cannot survive with such a lot of competition.
The last condition for the existence of a perfectly competitive market is that all the information a manager needs to make a decision (about prices, technology, probable profits, etc.) is freely available to everyone. Firms have the ability to respond quickly and rationally to changing market conditions by shifting applied resources. There are no commercial secrets of unpredictable developments, unexpected actions of competitors. That is, the firm makes decisions 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.
Neither firm sees competitors as a threat to its market share of sales and therefore is not interested in its competitors' manufacturing solutions. Information about prices, technology and likely profits is available to any firm, and it is possible to quickly respond to changing market conditions by moving the applied production resources, i.e. selling some factors of production and investing the proceeds in others.
Violation of any of these requirements leads to the undermining of perfect competition and the emergence of imperfect competition.
In reality, there are no markets that fully satisfy the conditions of perfect competition, and only some of the markets approach it (for example, the market for grain, securities, foreign currencies, the stock exchange, the market for agricultural products (wheat, sugar, flour), and also some segments of food products wide consumption (bakery products, many types of medicines, etc.).
Signs of perfect competition
Pure, or perfect, competition occurs in an industry where there are a very large number of enterprises producing the same type of product (meat, wheat, milk, etc.).Under these conditions, it is not possible to use methods of non-price competition, each enterprise cannot control prices in the market, it is not difficult to enter the industry or, if necessary, leave it.
If this type of competition (pure) dominates in the industry, then we have the opportunity to talk about a competitive market, in other situations there is imperfect competition in the market.
First of all, let's define in detail the signs of pure competition:
The first thing that catches your eye is a large number of manufacturers and sellers with small volumes of products produced by each.
Secondly, all products are homogeneous, standardized, so it is practically very difficult to use methods of non-price competition (quality, advertising).
Third, the individual producer cannot control the price. This is due to the fact that each manufacturer produces a small amount of goods, there are many sellers of this product, so a price change by one manufacturer cannot actually affect the market price in any way.
In this regard, each producer simply agrees with the market price established in a given period and only adapts to it so as not to incur losses.
And finally, fourthly, there are no serious obstacles to the entry of new manufacturers into the industry. As a rule, production in such industries is not associated with complex technological processes that require special expensive equipment and highly skilled labor, therefore, there are no special financial difficulties, and large capitals are not required to enter this industry.
Pure competition in practice is quite rare, only agricultural production can serve as an example, but the analysis of such competition is necessary because:
1) there are industries that are as close as possible to pure competition;
2) pure competition is the simplest situation, the knowledge of which is necessary to understand the behavior of the manufacturer, the mechanisms for determining production volumes and effective prices. In short, it is the starting point of any kind of competitive behavior;
3) the mechanism of pure competition plays the role of a standard by which the real market situation is assessed, since this is an ideal market model.
Perfect competition model
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, it is not difficult to create a new firm, and there is no problem if an individual firm decides to leave the industry (because 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.
For your information. In practice, no existing market is likely to meet all the criteria for perfect competition listed here. Even markets that are very similar to perfect competition can only partially satisfy 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, tailors, photographic shops, car repair shops, construction crews, apartment renovation workers, peasants in 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 the size of the market, 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 a perfectly competitive 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.
Branches of perfect competition
In the short term, it is convenient to analyze the industry and competition in terms of the perfect competition model. This assumes that many producers sell a large number of standard products to many consumers. Specialists who study the industry of perfect competition take into account that any decision made by the firm to increase / decrease the price level will not affect the market prices as a whole. In addition, the analysis of the industry and its perfect competition implies the absence of non-price competition. In microeconomics, a perfectly competitive industry is the standard for maximizing profits and evaluating the performance of the economy as a whole.Operating in a market where the level of competition in various industries largely depends on the legislation of the country, the company is faced with a large number of competitors, one way or another affecting its activities and profits. Therefore, in the process of strategic and tactical planning, it is extremely important to conduct a comprehensive analysis of competition, which implies a study of the work of competing companies and the competitiveness of the goods sold.
Competition, analysis, strategy and practice
In fact, competition, analysis, strategy and market research practices accompany the marketing activities of every firm. When compiling a marketing program, specialists determine whether the industries under study operate in conditions of perfect or imperfect competition, whether they have signs of an absolute monopoly.
Most often, competition in an industry is imperfect in one of the following types:
Pure monopoly;
monopolistic competition;
oligopoly.
Competition in business - meaning and consequences
In general, effective competition in modern business implies the dynamic sale of exactly the product that buyers need at a given time, and for which they are willing to pay. Active competition in business and its consequences are quite positive for consumers - the range and quality of services and goods is growing, while prices are falling. For the firms themselves, intense competition in small businesses is an incentive to enter new markets and introduce innovations. Thus, manufacturing industries in conditions of monopoly, imperfect or perfect competition are forced to monitor the competitive environment as the most striking distinguishing feature of a business.
Business competition
The preparation of each business plan implies the obligatory presence of a section on competitors.
The competition in the business plan is analyzed:
By grouping competitors according to the competitive positions they use (for a better understanding of their motivation);
through the presentation of the market in the form of a rating of firms, starting with those using the most aggressive methods of fighting “for the buyer's money”.
In the analysis process in each business plan, competition is considered in terms of the uniqueness, strengths and weaknesses of the product / service. It is also taken into account that competition in large and small businesses is conducted by completely different methods.
Levels of competition and their evaluation
Marketing analysis of competition on the example of any of the firms begins with a list of competitors. It is important for analysts to highlight the main and secondary companies, their advantages and disadvantages. Also, competition analysis should be performed on the example of a market niche occupied by competitors, exploring the methods of selling competitive products, its main consumers and customers.
Grouping for the analysis of data of organizations helps to fulfill the levels of competition when all firms are included in the list of competitors:
Offering similar products;
offering similar products in the same price range;
solving the same consumer problem with their product;
selling similar products.
From a legal point of view, the analysis of competition in the market and the competitiveness of any product is carried out by assessing whether the product meets the GOSTs, TUs and other standards of the country to which it is supplied. Advertising analysis of information competition in the market includes the assessment of the image of the product, the "hype" of the brand and the reputation of the company. They also analyze ways of informing consumers - the text on the packaging, information from the data sheet, etc.
Economic and commercial level of competition in the market
For the studied product, the quality level, its cost and operating costs are determined. Also, performing an analysis of technological competition, they find out the amount of production costs, required investments, technical features of production and its organization. They analyze the level of competition in the market depending on the level of supply-demand, the geographical nuances of the market, the social significance of the product, the degree of reliability of delivery and the settlement system. Examples of levels of competition in developed dealer and service networks are also taken into account.
Analysis of the level of competition
When performing a qualitative analysis of the level of competition between firms, as a rule, they consider the identity of their sizes and the technologies and resources used. In addition, the level of market competition depends on the number of firms competing with each other and the barriers to exit of firms from this market.
Examples of levels of competition
Considering examples of the levels of competition of various products, marketers evaluate whether a manufacturing company has the ability to make its products more attractive than competitors. After all, competition in the manufacturing industry is about striving for sustainable growth and consumer acceptance.
Porter's Competition Analysis Model
Evaluating the industry position of the company in a strategic perspective allows you to perform the Porter competition analysis model, which includes five levels:
Assessing the threats of the emergence of new participating firms;
evaluation of market power of consumers;
assessment of the market power of supplier firms;
analysis of the level of intra-industry competition;
assessment of the danger of the appearance of substitute goods.
Porter's current 5-factor model of strategic competition analysis ensures long-term profitability of manufactured products. Thanks to it, the competition of the company in the selected industry for a long period of time is maintained with high profitability and competitiveness.
Porter's Competition Analysis: Factors Influencing Entry Barriers
The analysis of competition according to Porter begins with the definition of entry barriers to the industry. It has been proven that by saving on scale, that is, by increasing production volumes, the firm minimizes production costs per unit of output. This prevents newcomers from achieving high profitability when entering the market. Also, the analysis of industry competition according to Michael Porter provides an assessment of how difficult it is for new players to occupy a niche in which there is already a fairly wide range.
Equally important factors influencing the level of competition in the industry are also the amount of start-up capital and fixed costs required to enter production and occupy the corresponding market niche. In addition, the high level of distribution competition in any industry does not allow new players to easily and quickly reach the target audience and makes the entire industry unattractive.
Analysis of competition in the industry: political and additional threats
When analyzing competition in the industry, it is important not to forget that the growth of government restrictions, the introduction of additional quality standards and product regulations reduces the attractiveness of the entire industry for new competitors.
Also, a detailed analysis of the level of competition in the industry under study includes the solution of a number of additional tasks:
Are existing competitors ready to lower prices to keep their market niche?
Do competitors have additional backup sources of funding and means of production to actively compete?
To what extent are the strategies and practices chosen by competitors consistent with their analysis of competition in the industry?
Are there opportunities for competitors to intensify their advertising confrontation or quickly establish other distribution channels?
How likely is it for the industry to slow down or stop growing?
Profit under perfect competition
According to the traditional theory of the firm and the theory of markets, profit maximization is the main goal of the firm. Therefore, the firm must choose such a volume of supplied products in order to achieve maximum profit for each period of sales.Profit is the difference between gross (total) income (TR) and total (gross, total) production costs (TC) for the sales period:
Profit = TR - TS.
Gross income is the price (P) of the product sold multiplied by the volume of sales (Q).
Since the price is not affected by a competitive firm, it can affect its income only by changing the volume of sales. If the firm's gross income is greater than its total costs, then it makes a profit. If the total cost exceeds the gross income, then the firm incurs losses.
Total costs are the costs of all factors of production used by the firm to produce a given output.
The maximum profit is achieved in two cases:
A) when gross income (TR) exceeds total costs (TC) to the greatest extent;
b) when marginal revenue (MR) is equal to marginal cost (MC).
Marginal revenue (MR) is the change in gross revenue received when an additional unit of output is sold.
For a competitive firm, marginal revenue is always equal to the price of the product:
The marginal profit maximization is the difference between the marginal revenue from the sale of an additional unit of output and the marginal cost:
Marginal Profit = MR - MC. Marginal cost is the extra cost that increases output by one unit of a good. Marginal cost is entirely variable cost, because fixed costs do not change with output.
For a competitive firm, marginal cost is equal to the market price of the good:
The marginal condition for profit maximization is the level of output at which price equals marginal cost.
Characteristics of perfect competition
Perfect (pure) competition - when an infinite number of producers or sellers of a given product operate on the market. Examples of pure competition are very rare. It can be attributed to the global securities market, US farming.Perfect competition in practice is very rare, but the set of concepts associated with it is often used in theoretical economics when building economic models and predicting the development of economic processes.
Under conditions of perfect competition, there are no such negative processes as: overproduction of goods, inflation, unemployment, monopolization of the market, since ideal economic conditions are formed in perfect competition.
General characteristics of perfect competition:
1. An infinitely large number of competing firms operate on the market, while none of the entities (whether it be a manufacturer, seller or buyer), due to their large number, can influence prices and therefore are forced to adapt to already established price levels. Demand for the products of a perfect competitor firm is absolutely elastic, i.e., it always exists and is constantly satisfied.
2. Equality and anonymity of enterprises operating in the market. - since absolutely identical products are produced under perfect competition, advertising, brand prestige, individual characteristics and product quality do not matter. The products of firm A are no different from those of firms B C and D.
3. Absolute mobility of material, labor and financial resources - since there are no economic, financial, technological or other obstacles.
4. Independence of any firm in decision making.
5. Free entry and exit from the market for any firm - there are no obstacles to this.
6. Full awareness of any company about all market parameters - about prices, costs, demand, production volumes, product properties and other things on the market and among competitors.
Perfect competition examples
Examples of a perfectly competitive market make it clear how efficiently market relations work. The key concept here is freedom of choice. Perfect competition occurs when many sellers sell the same product and many buyers buy it. No one is able to dictate conditions, to inflate prices.Examples of a perfectly competitive market are not very common. In reality, very often there are cases when only the will of the seller decides how much this or that product will cost. But with an increase in the number of market players who sell an identical product, an unreasonable overstatement is no longer possible. The price is less dependent on one particular merchant or a small group of sellers. With a serious increase in competition, on the contrary, buyers already determine the cost of the product.
Examples of a perfectly competitive market
In the mid-1980s, US agricultural prices plummeted. Disgruntled farmers began to blame the authorities. In their opinion, the state has found a tool to influence the prices of agricultural products. It dropped them artificially to save on mandatory purchases. The fall was 15 percent.
Many farmers personally went to the largest commodity exchange in Chicago in order to make sure they were right. But they saw there that the trading platform brings together a huge number of sellers and buyers of agricultural products. No one is artificially able to lower the price of any product, because there are a huge number of participants in this market, both from one side and the other. This explains why unfair competition is simply impossible under such conditions.
Farmers were personally convinced at the stock exchange that everything is dictated by the market. Prices for goods are set regardless of the will of one particular person or state. The balance of sellers and buyers established the final cost.
This example illustrates this concept. Complaining about fate, US farmers began to try to get out of the crisis and no longer blamed the government.
The characteristics of perfect competition are:
The cost of goods is the same for all buyers and sellers of the market.
Product identity.
All market players have full knowledge of the product.
A huge number of buyers and sellers.
None of the market participants individually affects pricing.
The producer has freedom of entry into any sphere of production.
All these signs of perfect competition, as they are presented, are very rare in any industry. There are few examples, but they exist. These include the grain market. Demand for agricultural products always regulates pricing in this industry, since it is here that you can see all of the above signs in one area of production.
Benefits of Perfect Competition
The main thing is that in conditions of limited resources, the distribution is more equitable, since the demand for goods forms the price. But the growth of supply does not allow to overestimate it too much.
Disadvantages of perfect competition
Perfect competition has a number of disadvantages. Therefore, one cannot fully aspire to it.
These include:
The model of perfect competition slows down scientific and technological progress. This is often due to the fact that the sale of goods with a high offer is given slightly above cost with minimal profit. Large investment reserves are not accumulated, which can be directed to the creation of more advanced production.
Goods are standardized. There is no uniqueness. Nobody stands out for sophistication. This creates a kind of utopian idea of equality, which is not always accepted by consumers. People have different tastes and needs. And they need to be satisfied.
Production does not calculate the content of the non-productive sector: teachers, doctors, army, police. If the entire economy of the country had a finished perfect form, humanity would forget about such concepts as art, science, since there would simply be no one to feed these people. They would be forced to go into the manufacturing sector in order to earn a minimum source of income.
Examples of a market of perfect competition showed consumers the homogeneity of products, the lack of opportunities to develop and improve.
marginal revenue
Perfect competition has a negative effect on the expansion of economic enterprises. This is due to the concept of "marginal revenue", due to which firms do not dare to build new production facilities, increase crop areas, etc. Let's take a closer look at the reasons.
Let's say one agricultural producer sells milk and decides to increase production. At the moment, the net profit from one liter of product, for example, is $1. Having spent funds for the expansion of forage bases, the construction of new complexes, the enterprise increased its output by 20 percent. But this was done by his competitors, also hoping for a stable profit. As a result, twice as much milk entered the market, which dropped the cost of finished products by 50 percent. This led to the fact that production became unprofitable. And the more livestock a producer has, the more he incurs losses. The perfectly competitive industry is in recession. This is a clear example of marginal revenue, beyond which the price will not rise, and an increase in the supply of goods to the market will only bring losses, not profits.
Antipode of perfect competition
They are unfair competition. It occurs when there are a limited number of sellers on the market, and the demand for their products is constant. In such conditions, it is much easier for enterprises to agree among themselves, dictating their prices on the market. Unfair competition is not always collusion, a scam. Very often there are associations of entrepreneurs in order to develop common rules of the game, quotas for manufactured products for the purpose of competent and effective growth and development. Such firms know and calculate profits in advance, and their production is devoid of marginal revenue, since none of the competitors suddenly throws a huge amount of production on the market. Its highest form is monopoly, when several large players unite. They lose their competition. In the absence of other producers of identical goods, monopolies can set an inflated, unreasonable price, making super profits.
Officially, many states are struggling with such associations by creating antimonopoly services. But in practice, their struggle does not bring much success.
Unfair competition occurs under the following conditions:
A new, unknown area of production. Progress does not stand still. There are novelties in science and technology. Not everyone has huge financial resources to develop technology. Often, a few advanced companies create more advanced products and have a monopoly on their sale, thereby artificially inflating the price of this product.
Productions that depend on powerful associations into a single large network. For example, the energy sector, the railway network.
But this is not always detrimental to society. The advantages of such a system include the opposite disadvantages of perfect competition:
Huge windfall profits make it possible to invest in modernization, development, scientific and technological progress.
Often such enterprises expand the production of goods, creating a struggle for the client between their products.
The need to protect one's position. The creation of an army, police, public sector workers, since many free hands are freed. There is a development of culture, sports, architecture, etc.
Summing up, we can conclude that there is no system that is ideal for a particular economy. In every perfect competition, there are a number of disadvantages that slow down society. But even the arbitrariness of monopolies and unfair competition only leads to slavery and a miserable existence. There is only one result - it is necessary to find a golden mean. And then the economic model will be fair.
Types of perfect competition
There are types of competition (perfect and imperfect):Perfect competition (oligopoly) is a state of the market in which there are many producers and consumers who do not affect the market price. This means that the demand for products does not decrease as sales increase.
The main advantages of perfect competition:
1) Allows you to achieve the conformity of the economic interests of producers and consumers through a balanced supply and demand, through the achievement of an equilibrium price and equilibrium volume;
2) Ensures the efficient allocation of limited resources due to the information embedded in the price;
3) Orients the manufacturer to the consumer, that is, to achieve the main goal, to meet the various economic needs of a person.
Thus, with such competition, an optimal, competitive state of the market is achieved, in which there is no profit and no loss.
Disadvantages of perfect competition:
1) there is equality of opportunity, but at the same time the inequality of the result remains;
2) benefits that cannot be divided and evaluated individually are not produced under conditions of perfect competition;
3) different tastes of consumers are not taken into account.
Perfect market competition is the simplest market situation that allows you to understand how the market mechanism really works, but in reality it is rare.
Imperfect competition is competition in which producers (consumers) influence the price and change it. At the same time, the volume of production and access of manufacturers to this market is limited.
Basic conditions of imperfect competition:
1) There are a limited number of manufacturers on the market;
2) There are economic conditions (barriers, natural monopolies, state taxes, licenses) for penetration into this production;
3) Market information is distorted and not objective.
All of these factors contribute to market disruption, as a limited number of producers set and maintain high prices in order to obtain monopoly profits.
There are 3 types:
1) monopoly,
2) oligopoly,
3) monopolistic competition.
Principles of perfect competition
Let's explore these principles on the example of the relationship between buyers and a typical competitive firm.First, let's define a rule of behavior for buyers. Since buyers have unlimited choices in the face of an infinite number of firms, with the slightest change in the offer price (deviation from the market price) of this firm, the volume of demand for its products will either decrease to zero or increase to infinity. This means that the behavior of buyers is characterized by a perfectly elastic demand for the products of each individual firm. Their behavior is expressed by the demand curve as a horizontal straight line (D).
Now let's turn to the company. The question arises: what quantity of goods under the given conditions will it offer for sale? The demand curve is nothing but the consumer spending curve. The constant price of a unit of goods means that each additional unit of output provides the company with a constant incremental income. Therefore, at any volume of production, the marginal revenue curve of the firm has the form of a horizontal straight line coinciding with the demand curve: MR = D. At the same time, this means that a competitive firm at any volume of production can receive the same income per unit of product. This income is average (AR). Therefore, the equality takes place: D = MR = AR. In other words, the curves for demand, marginal income, and average income are the same.
From the analysis of the principles of production, it is known that with the growth of output, marginal costs increase; the MC curve has a positive slope and coincides with the supply curve, so MC = S. It is also known that the firm sets the optimal production volume according to the rule of equality of marginal revenue and marginal cost: MR = MC. Finally, recall that the relationship between marginal and average is such that the marginal cost curve intersects the average cost curve (AC) at the latter's minimum. Therefore, the firm's supply corresponds to the point (A) of the intersection of the MR, MC, and AC curves.
Point A corresponds to the volume of supply Qo and price Rho; a given quantity of a good will be offered for sale at a given price. At the same time, point A lies on the demand curve D. Projections from this point onto the volume scale and the price scale indicate that buyers are ready to buy a given quantity of goods (Qo) at a price of P0. Thus, the price of Ro ensures equality of demand for the products of this firm and its supply.
There is no reason why a firm would sell at a lower price and customers would buy at a higher price; this price is the best for them. The firm cannot sell this quantity of goods at the price P1>P0, since the demand for its products will be reduced to zero. At the same time, it cannot sell this volume of production at the price P2
So, the equilibrium of the firm is ensured when the demand curve touches the average cost curve at the point of intersection of the latter and the line of marginal cost. Hence, there is a triple equality: market price = marginal cost = average cost (P = MC = AC). The firm earns zero net profit, enough to have an incentive to stay in the industry (Since all competitive firms have the same (equal to the market price) marginal cost and marginal revenue corresponding to the minimum total average cost, under perfect competition no one has an incentive to enter into or out of the industry).
Having considered the relationship between buyers and a typical competitive firm, we can assume that these relationships are typical for a competitive market, are a general rule.
Thus, perfect competition is characterized by the following principles:
The rule of perfectly elastic demand for the products of each individual firm;
the rule of (exclusively) price competition between market participants;
profit maximization rule: P = MR = MC.
Perfect competition in the long run
The entrepreneur is interested not only in the immediate result, but also in the prospect of the development of the enterprise. Obviously, in the long run, the firm also proceeds from the problem of profit maximization.The long run differs from the short run in that, firstly, the producer can increase production capacity (so all costs become variable) and, secondly, the number of firms in the market can change. In conditions of perfect competition, the entry and exit to the market of new firms is absolutely free. Therefore, in the long run, the level of profit becomes a regulator of attracting new capital and new firms to the industry.
If the established market price in the industry is above the minimum average cost, then the possibility of obtaining economic profit will serve as an incentive for new firms to enter the industry. As a result, the industry supply will increase, and the price will decrease. Conversely, if firms incur losses (at a price below the minimum average cost), this will lead to the closure of many of them and the outflow of capital from the industry. As a result, industry supply will decrease, which will lead to higher prices.
The process of entry and exit of firms will stop only when there is no economic profit. A firm making zero profits has no incentive to exit, and other firms have no incentive to enter. There is no economic profit when the price is at the minimum average cost. In this case, we are talking about long-term average costs.
Long-run average costs are the costs of producing a unit of output in the long run. Each point corresponds to the minimum of short-term unit costs for any size of the enterprise (output). The nature of the long-term cost curve is associated with the concept of economies of scale, which describes the relationship between the scale of production and the magnitude of costs (the economies of scale discussed in the previous chapter). The minimum long-term costs determine the optimal size of the enterprise. If the price is equal to the minimum long-run unit cost, the profit of the firm in the long run is zero.
Production at the lowest average cost means production with the most efficient combination of resources, i.e. firms make the best use of factors of production and technology. This is certainly a positive phenomenon, especially for the consumer. It means that the consumer receives the maximum amount of output at the lowest price that unit costs allow.
A firm's long-run supply curve, like the short-run supply curve, is the portion of the long-run marginal cost curve above the long-run unit cost minimum. The industry supply curve is obtained by summing the long-run supply of individual firms. However, unlike in the short run, the number of firms can change in the long run.
So, in the long run, in a perfectly competitive market, the price of a good tends to a minimum of average costs, and this, in turn, means that when industry equilibrium is reached in the long run, the economic profit of each of the firms will be equal to zero.
At first glance, the correctness of this conclusion can be doubted: after all, individual firms can use unique factors of production, such as soils of increased fertility, highly qualified specialists, modern technology that allows them to produce products with less material and time.
Indeed, the costs of resources per unit of output for competing firms may differ, but the economic costs will be the same for them. The latter is explained by the fact that in conditions of perfect competition in the market for factors of production, a firm will be able to acquire a factor with increased productivity if it pays for it a price that raises the firm's costs to the general level in the industry. Otherwise, this factor will be outbid by a competitor.
If the firm already has unique resources, then the increased price should be accounted for as an opportunity cost, because at that price the resource could be sold.
What motivates firms to enter an industry if economic profits are zero in the long run? It all depends on the possibility of obtaining high short-term profits. To ensure this possibility by changing the situation of short-term equilibrium, the impact of external factors, in particular changes in demand, can. An increase in demand will bring short-term economic profit. In the future, the action will develop according to the scenario already described above.
Thus, perfect competition has a peculiar mechanism of self-regulation. Its essence lies in the fact that the industry responds flexibly to changes in demand. It attracts a volume of resources that increases or decreases the supply just enough to compensate for the change in demand, and on this basis ensures the long-term break-even of firms operating in the industry.
If we connect two equilibrium points of the industry in the long run with various combinations of aggregate demand and aggregate supply, then the supply line of the industry in the long run is formed - S1. Since we assumed that the prices of factors of production are unchanged, the line S1 runs parallel to the x-axis. This is not always the case. There are industries in which resource prices rise or fall.
Most industries use specific resources, the number of which is limited. Their application determines the upward nature of the costs in this industry. The entry of new firms will lead to an increase in demand for resources, the appearance of their deficit and, as a result, to a rise in price. For each new firm entering the market, scarce resources will cost more and more. Therefore, the industry will be able to produce more products only at a higher price.
Finally, there are industries in which, as the amount of resource used increases, its price decreases. The minimum average cost is also reduced in this case. Under such conditions, the growth of sectoral demand will cause in the long run not only an increase in the volume of supply, but also a decrease in the equilibrium price. Curve S1 will have a negative slope.
In any case, in the long run, the industry supply curve will be flatter than the short run supply curve. This is explained as follows. Firstly, the ability to use all resources in the long run allows you to more actively influence price changes, therefore, for each individual firm, and, consequently, for the industry as a whole, the supply curve will be more elastic. Secondly, the possibility of "new" firms entering the industry and "old" firms leaving the industry allows the industry to respond to changes in the market price to a greater extent than in the short run.
Consequently, output will increase or decrease by a greater amount in the long run than in the short run in response to an increase or decrease in price. In addition, the industry's long-term supply price bottom is higher than the short-term supply chain bottom because all costs are variable and must be recovered.
So, in the long run, under conditions of perfect competition, the following will happen:
A) the equilibrium price will be set at the level of the minimum long-term average cost, which will ensure the long-term break-even of firms;
b) the supply curve of a competitive industry is a line passing through the break-even points (minimum average costs) for each level of production;
c) with a change in demand for the industry's products, the equilibrium price may remain unchanged, decrease or increase, depending on how the prices of production factors change. The industry supply curve will take the form of a horizontal straight line (parallel to the x-axis), an ascending or descending line.
Disadvantages of perfect competition
Perfect competition has a number of disadvantages:1) perfect competition takes into account only those costs that pay off. In conditions of insufficient specification of property rights, underproduction of positive and overproduction of negative externalities is possible;
2) does not provide for the production of public goods, which, although they bring satisfaction to consumers, however, cannot be clearly divided, evaluated and sold to each consumer separately (national defense, etc.);
3) perfect competition, involving a huge number of firms, is not always able to provide the concentration of resources necessary to accelerate scientific and technological progress (basic research, science-intensive and capital-intensive industries);
4) contributes to the unification and standardization of products. It does not take full account of the wide range of consumer choices;
5) the market system of income distribution inevitably leads to the emergence of wealth inequality. The economic differentiation of the population, which is not counteracted by state policy, tends to intensify and turn into social and political differentiation. This not only interrupts social stability, but also becomes a powerful factor in increasing the inefficiency of the economy;
6) the inevitable consequence of the market is unemployment, or underemployment of the most important resource - labor;
7) The market develops in people not only positive personal qualities, but also negative ones, for example, selfishness, cruelty, lack of interest in the situation of other people.
The disadvantages of a perfectly competitive market are:
A) low production volume;
b) a high level of advertising spending;
c) price instability;
d) low level of spending on R&D (research and development).
Pure perfect competition
Pure (perfect) competition is competition that occurs in a market where a very large number of firms producing standard, homogeneous goods interact. Under these conditions, any firm can enter the market, there is no price control.In a market of pure competition, no individual buyer or seller has much influence on the level of current market prices of goods. The seller cannot ask for a price higher than the market price, since buyers can freely purchase any quantity of goods they need at it. In this case, firstly, we have in mind the market for a certain product, such as wheat. Secondly, all sellers offer the same product on the market, i.e. the buyer will be equally satisfied with the wheat purchased from different sellers, and all buyers and sellers have the same and complete information about the market situation. Thirdly, the actions of an individual buyer or seller do not affect the market.
The mechanism of functioning of such a market can be illustrated by the following example. If the price of wheat rises as a result of increased demand, the farmer will respond by expanding his planting next year. For the same reason, other farmers will sow large areas, as well as those who have not done this before. As a result, the supply of wheat on the market will increase, which may lead to a drop in the market price. If this happens, then all producers, and even those who did not expand the area under wheat, will experience problems with its sale at a lower price.
Thus, a market of pure competition (or perfect) is one in which the same price is set for the same product at the same time, for which:
Unlimited number of participants in economic relations and free competition between them;
absolutely free access to any economic activity of all members of society;
absolute mobility of factors of production; unlimited freedom of movement of capital;
absolute awareness of the market about the rate of return, demand, supply, etc. (implementation of the principle of rational behavior of market entities (optimization of individual well-being as a result of income growth) is impossible without complete information);
absolute homogeneity of goods with the same name (absence of trademarks, etc.);
the existence of a situation where none of the participants in the competition is able to directly influence the decision of another by non-economic methods;
spontaneous price fixing in the course of free competition;
the absence of monopoly (the presence of one producer), monopsony (the presence of one buyer) and non-intervention of the state in the functioning of the market.
However, in practice, there cannot be a situation where all these conditions are present, therefore there is no free and perfect market. Many real markets operate according to the laws of monopolistic competition.
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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