Market balance labor is set at the intersection of market demand and market supply. Equilibrium at a point E corresponds to the level wages W, in which will be sold and bought L E labor for a certain time (Fig. 8.3).

At the point E the labor market is in equilibrium, since the demand for labor is equal to the supply of labor. Hence the point E determines the state of full employment, and wage acts as the price of equilibrium in the labor market.

With higher wages W′ the labor market will experience an excess work force, measured by a segment L′ D L′ S . There is competition among unemployed workers, which will lead to a decrease in wages.

At any salary W″ below equilibrium W E there will be a labor shortage in the labor market, measured by a segment L″ S L″ D, which will lead to competition among entrepreneurs for hiring labor, and, ultimately, to higher wages. Thanks to the growth of wages, the circle of hired workers who are ready to offer their labor is expanding.

However, the specificity of labor supply is manifested in two phenomena acting in opposite directions. This:

substitution effect;

income effect.

They are manifested in the clarification of the reaction of individual workers to the increase in wage rates.

substitution effect arises when, with high wages, free time (leisure time) is seen as a potential loss. An hour of leisure seems more and more expensive, and the worker prefers to work instead of leisure. This leads to an increase in the supply of labor. However, with a further increase in wages, income effect. It arises when high wages are regarded as a source of the possibility of increasing leisure, and not labor, which in this case is regarded as an inferior commodity.

32. Physical and loan capital. Profit rate and interest rate. Equilibrium in the market of loan capital.

Physical (production) capital is a source of income invested in a business in the form of means of production. It includes buildings, machine tools, rolling mills, automobiles, computers and other structures, machines, equipment used for the production of goods and services. In addition, capital includes stocks of raw materials, materials, semi-finished products, components, which, with the help of tools, are converted into other goods in one production cycle. This aspect of capital reflects more fully than the others the interpretation of the German word " Withapital", -French " Withapital"- the main property, the main amount and the Latin " Withapitalis" - main.

At the same time, entities need funds to acquire production assets. For these purposes, firms use borrowed funds or money (loan) capital. Therefore, in a different sense, when they say capital, they mean investing money or investing it for the construction of new production facilities, durable resources in order to increase the production of goods and services. In this meaning, according to a number of economists, capital is money, as a universal commodity of the business world.

Loan interest- the price (income) paid (received) for the use (provision) of loan capital

Interest rate (%) is the ratio of the amount of annual income received on loan capital to the amount of loan capital.

The nominal rate shows the expected return on capital, the real rate shows the actual return on capital, taking into account the inflation rate.

Low rate % stimulates investment high rate %- reduces.

Entrepreneur investing cash in production, waiting to receive profit - income on entrepreneurial ability.

Rate of return productive investment (capital) expresses rate of return (profitability), reflecting the efficiency of the use of acquired factors of production:

In these conditions:

interest rate (i, r) – resource cost

rate of return (R) - return on capital

Equilibrium in the capital market is established as a result of the interaction of the demand for capital as investment resources and the supply of capital as temporarily free cash.

11. Elasticity of the offer. Factors affecting the elasticity of supply.Supply elasticity- this is an indicator of the relative change in the quantity of goods offered on the market in accordance with the relative change in the competitive price. The degree of change in the supply volume, depending on the price increase, characterizes supply elasticity. where ∆ Q s- Changed value of the offer.

If the proposed number of goods ( Q s) remains unchanged when prices change, then we are dealing with inelastic supply ( E s = 0).

When the slightest decrease in the price of a commodity causes a reduction in supply, and slightest increase price increases, then it is a perfectly elastic supply ( E s > 1).

If E s= ∞ is the firm's supply in the long run at a stable price

E S<1 - неэластичное предложение (сильное изменение цены вызывает слабое изменение предложения);

E S =1 - weak (strong) change in price causes the same weak (strong) change in supply;

P E S = 0 E S < 1 E S = 1 E S > 1 E S = ∞

Rice. 3.15. Types of elasticity of supply The elasticity of the supply of a product depends on many factors: from the differentiation of individual costs for different enterprises, the availability of a free labor force, the speed of capital flow from one industry to another, etc. Supply elasticity factors First, one of the determining factors in the elasticity of the supply of a product is the mobility of its factors of production; the speed at which these factors move from other applications determines the ability of retailers to quickly change production volumes. For example, the supply of land on which to grow grapes is inelastic, since it is almost impossible to expand it ( E s= 0). On the contrary, goods such as computers, ice cream, cars, are characterized by elastic supply, since their producers can increase their production when prices rise. Secondly, the elasticity of supply depends to a large extent on the time interval. As with demand, supply elasticity increases over long-term time frames. In the long run, factors of production are more mobile, and the adaptation of producers to new market conditions brings production opportunities closer to changing market demand, which leads to an increase in supply elasticity.

12. State influence on market pricing (taxes, price controls, subsidies) and its consequences. State price regulation is necessary to prevent: price inflation with a steady deficit; producer monopoly; a sharp rise in prices for exploited raw materials and fuel. State price regulation contributes to the creation of normal competition, the achievement of certain social results. Measures of influence on producers by the state can be direct (by establishing certain pricing rules) and indirect, through economic leverage. Direct state price regulation is used only in highly monopolized industries. The freezing of prices and wages limits the intersectoral flow of capital, slows down investment policy, reduces the level of business activity, and restrains income growth. Indirect price regulation is: restrictive (restrictive) monetary policy, regulation of the discount rate of federal reserve banks; purchase of goods and services; tax policy. Price controls constrain production, stimulate consumption, suppress technological advances, and make it dependent on imports. The state can influence the pricing process in three ways: set fixed prices (introduce state list prices, for example, for electricity, railway tariffs, housing and communal services, travel in public transport), freeze prices, fix the prices of monopoly enterprises; determine the rules in accordance with which enterprises themselves set prices regulated by the state (established ie the marginal level of prices for certain types of goods; regulation of the main price parameters, such as profit, discounts, indirect taxes, etc.; determination of the marginal level of a one-time increase in the prices of specific goods); establish market "rules of the game", i.e. introduce a number of prohibitions on unfair competition and market monopolization (a ban on horizontal and vertical price fixing; a ban on dumping). Tax regulation is one of the fairly effective principles of state pricing policy. All taxes can be divided into two large groups: direct and indirect. Direct taxes are paid directly from the income of the taxpayer, while indirect taxes are included directly in the price of the product and are paid by the consumer when it is purchased. Indirect taxes lead to an increase in the equilibrium price and a decrease in sales, in addition, they reduce the revenue of the manufacturer. Consequently, the burden of indirect tax is distributed between the consumer and the producer. The methods of tax regulation of prices include the establishment of value added tax (VAT) and the amount of excise duty. Exemption of certain goods from VAT, as well as a change in the rate of this tax on certain goods, can effectively influence structural changes and the development of production in the most important sectors of the national economy. Most countries have defined a list of excisable goods and excise duty, which significantly affect prices. The establishment of excise duties by the state is intended to ensure the distribution of consumption of goods, protect domestic producers, regulate the profits of commodity producers in the event of a large difference between prices and production costs, replenish the state budget. State subsidies are used as price regulation measures. Some industries require constant state support (for example, the coal industry) in the form of subsidized surcharges to producers or consumers. A subsidy is an appropriation from the state budget directed to cover the losses incurred by an enterprise, in particular, due to the sale of its products at state prices, which do not cover its costs. In other words, this means that if a subsidy is established for a product, then one part of the real price is paid by the consumer, and the other part is paid by the state. Thus, the price of goods for the consumer decreases

30.Demand for resources in the markets for factors of production: nature, factors, fundamental principles.

Resources (factors of production) are what is used to produce goods and services. Distinguish between material resources (land and capital) and human resources (labor and entrepreneurial activity). Markets for resources (factors of production) are spheres of commodity circulation of such important groups of resources economic activity like land, natural resources, labor resources, capital. The most important function of these markets is to promote more efficient production of goods and services. Microeconomic analysis of resource markets involves the study of the strategy of the behavior of firms purchasing resources (the mechanism for making decisions about the volume of purchased resources and prices); consideration of situations in which equilibrium in resource markets depends on how much market power firms have in the markets finished products.

1. General characteristics of resource markets. Resource demand and supply. The peculiarity of the individual labor supply

Distinguish between perfect and imperfect competition resource markets. Perfectly competitive factor market is a market in which there are a large number of buyers (sellers) - a factor of production. Each buyer (employer) acquires a small part of the available supply volume of the resource. Each resource owner sells only a small part of the total supply and cannot significantly influence the market supply. Here there is free entry and exit to the market of sellers and buyers. In a perfectly competitive market, individual buyers or sellers cannot dictate the price of resources. Buyers (hirers) of the resource are informed about the prices, and the seller demanding a higher price will not be able to find a buyer. The resource price is formed in given time depending on the ratio of supply and demand for it. The firm-buyer of the resource at each given moment accepts the price as given. Imperfect Competition Resource Market is a market where there is only one buyer this resource(monopsony) or several (oligopsony). Firms with monopsonic or oligopsonic power can influence the prices of acquired inputs. Most labor markets are characterized by imperfect competition. So, in small towns, the economy is almost completely dependent on one large firm that provides work for a significant part of the working population. The study of resource markets involves studying the supply and demand for resources. The demand of purchasing firms for resources is derived from the demand for products manufactured using these resources . In other words, resources satisfy the needs of the buyer not directly, but indirectly, through the production of goods and services. Derived nature of demand for resources means that the stability of demand for any resource will depend, first of all, on the productivity of the resource when creating a product and on commodity prices produced with this resource. A highly productive resource that produces a commodity that is in high demand will be in great demand. There will be no demand for a resource that produces an unnecessary good. Resource Demand Feature allows you to show the specifics of its elasticity. The sensitivity of this demand, its response three factors determine the change in the price of resources. The first is the elasticity of demand for finished products: the higher it is, the more elastic the demand for resources will be. When an increase in the price of a good causes a significant drop in demand for it, the need for resources decreases. In the case when, on the contrary, the demand for products manufactured with the help of these resources is inelastic, the demand for resources is also inelastic. The second factor is the substitutability of resources. The elasticity of demand for them is high if, in the event of a price increase, there is the possibility of replacing them with other resources. The third factor is the share of these resources in the total production costs of finished products. The larger their share, the higher the elasticity of demand. The supply of resources (with their general limitation) at any given moment is a quite definite value. At another moment, it can actually change under the influence of some factors. For example, reclamation work in a given quarter increased the supply of land, changes in wages affected the supply of labor, and so on.

The demand for a factor (labor) is a derivative - it depends on the demand for the product produced in the industry.

In a competitive labor market, the equilibrium wage and the level of employment are determined by the intersection point of the supply and demand curves (Fig.

Rice. 8.2. Equilibrium in a competitive labor market

Labor supply and labor demand of an individual competitive firm

For an individual firm, the market wage rate acts as a horizontal direct labor supply (Fig. 8.3).

Rice. 8.3. Equilibrium in the labor market for an individual firm

Since the wage rate for a particular firm hiring workers in the labor market acts as a given value, the supply curve S l = MRC l is perfectly elastic. Here, the MRP l curve acts as its labor demand curve.

The firm will get the maximum profit if it hires such a number of employees that MRP l = MRC l .

The firm hires new workers only until its marginal revenue from the product (MRP l) equals the marginal cost of the resource (MRC l), in this case, labor.

Determinants of labor demand

1. Changes in the demand for a product: other things being equal, an increase in the demand for a product increases the demand for the resources used to produce that product, while a decrease in the demand for a product leads to a decrease in the demand for the resources required to produce it.

2. Changes in productivity: other things being equal, a change in the productivity of resources also causes a change in the demand for a resource, and the derivative change goes in the same direction as the original one that caused it. Performance can be affected by:

The amount of other resources used;

Technical progress;

Improving the quality of resources.

3. Changes in the prices of other resources.

If the substitution effect outweighs the volume effect, then a change in the price of a resource causes the same change in the demand for the replacement resource.

If the output effect exceeds the substitution effect, then a change in the price of a resource causes an opposite change in the demand for the replacement resource.

The marginal profitability of a product by a factor (labor), or marginal factor revenue, is the additional income that a firm will receive from using one more, additional, unit of a resource:

This value determines the demand for labor.

The market demand for labor is the sum of industry demands various industries economy.

The elasticity of market (industry) demand with respect to the wage rate is determined by the formula

The supply of labor is determined by the wage rate, which is equal to marginal cost labor (this is the additional cost of hiring an additional unit of labor). The firm, maximizing its profits, will hire new workers until each new employee brings additional revenue in excess of his wage rate, i.e. MRP l > w and MRP l = MRC l .

The profit will be maximum under the condition of MRP l = w.

The hiring decision will be determined by the balance between the demand for labor and the supply of labor at given market wage rates.

The labor market under perfect competition. Demand and supply of labor

Labor market - is a collection economic relations regarding the sale and purchase of labour. The labor market is dynamic system, in which the volume, structure, demand and supply of labor is formed.

The labor market in conditions of perfect competition has the following features :

• a large number of firms competing in the market when hiring workers of this type of work;
• the presence of many workers of the same qualifications offering their labor;
• neither firms nor employees can dictate rates wages .

The subjects of demand in the market are entrepreneurs and the state, and the subjects of supply are workers with their skills and abilities. The object of sale and purchase is a specific product - labor power (labor). The price of labor is wages.

When hiring additional employees, firms are guided by the following considerations :

The demand for any factor is determined by the desire for maximum profit. Profit is maximized by increasing the involvement of labor up to a level where the income from the marginal product of labor (income from an additional unit of output obtained with the help of an additional worker - MRPL) will be equal to the marginal cost of it (wage - W). Therefore, it will be profitable for the firm to hire workers subject to the equality MRPL = W.

The demand for labor is inversely related to wages. . With an increase in wages, the demand for labor on the part of the entrepreneur decreases, and with a decrease in wages, the demand for labor increases. The supply of labor is directly related to wages. .

When considering the supply of labor, it is necessary to take into account two relatively independent effects that influence the choice of each individual: more rest or more work. These are the substitution effect and the income effect.

substitution effect called the next process. With an increase in wages, each hour of hours worked is better paid, therefore, each hour of free time is a lost profit for the employee, so there is a desire to replace free time extra work. It follows from this that free time is replaced by the set of goods and services that the worker can purchase with the increased wages.

essence income effect is that as wages rise, the labor supply of the individual worker is reduced in favor of pastime and leisure alternatives to work.

From this it is clear that the substitution effect of a wage increase will lead to an increase in the supply of labor, and the income effect will be expressed in its reduction. The final change in labor supply depends on the relative strength of the substitution effect and the income effect .

The individual labor supply curve is clearly shown in Figure 1 . We see that an increase in wages from W1 to W2 leads to an increase in the number of working hours from t1 to t2. Here the substitution effect prevails. The SL curve is ascending. A further increase in wages from W2 to W3 is not reflected in the increase in working hours, the employee works as much as before. Here the substitution effect is equal to the income effect. The SL curve is a vertical line. An increase in the wage rate from W3 to W4 leads to a reduction in the working day from t2 to t3. Here, the income effect is stronger than the substitution effect. The SL curve is downward.

Although the individual labor supply curve can be curved, in general, the market supply curve of any kind of labor tends to increase (Figure 2), reflecting the fact that in the absence of unemployment hiring firms will be forced to pay higher wage rates to get more workers.

Under perfect competition, as noted above, marginal revenue is equal to the price of the product prevailing in the market: МR = Р. A profit-maximizing firm hires workers until the marginal profitability of labor is equal to wages (МRРL = W), t .e. until the marginal revenue from the use of labor is equal to the cost associated with its purchase, which is wages (W).

If in the formula МРР L is replaced by wages W, and marginal revenue МR by price Р, we get:

W = P * MP L ; MP L = W/P,

where W is the nominal wage;

P is the issue price;

W/P - real wages.

From the resulting formula, you can make conclusion that the profit maximization condition is equality between the marginal product of labor and real wages.

How should a firm behave? If marginal revenue exceeds marginal cost, total profit may increase with an increase in the number of employees (MRL > MC), then the number of employees should be increased.

If MR L< МС, то следует уменьшить число занятых, поскольку прибыль уменьшается с каждым дополнительным рабочим.

If MR L = MC, then the number of employees should not be changed, since profit is maximum.

All the above reasoning about the conditions for maximizing the profits of a firm that hires a certain amount of labor to obtain additional income from hiring it allows us to draw one more conclusion - the labor demand curve DL coincides with the MRP L curve and reflects the change in the value of the marginal (marginal) product of labor ( MRP L).

The demand for labor rises as the wage rate falls. Changes in the price of a resource, ceteris paribus, lead to movement along the curve.

The law of demand in the labor market: the higher the wage rate, the fewer workers the firm (employer) wants to hire.

Rice. 20. Change in the demand for labor with a change in its payment (a), shifts in the demand curve for labor (b)

To the factors determining the change in the position (shift) of the labor demand curve, relate:

price of manufactured products. The cost of the marginal product is equal to the product of the marginal product and the price (MRP L = MP L * P). A change in the price of a good leads to a change in the cost of marginal product, and at the same time there is a shift in the demand curve for labor:

With an increase in price (P goods) => MRP L = MP L * P → D L 1 → up to D L 2;

When the price decreases (R goods ↓) => MRP L ↓ = MP L * P→ D L 1 →→ to D L 3;

technology changes. The marginal productivity of labor will rise as the means of production are increased and improved. For example, the work of a digger who uses an excavator, and a digger with a simple shovel; the work of an economist equipped with a personal computer and an economist with simple stone abacus;

suggestion of other factors. The amount of a factor of production available can affect the marginal product provided by other factors.

In addition to demand, the labor market characterizes its supply.

Labor supply is the amount of working time that the population is willing and able to spend on income-generating work.

The peculiarity of the market supply curve for labor is that it can slope not only up, but also down.

Rice. 21. Individual labor supply curve

The decision on how much labor can be offered in the market is connected with the possibility of alternative use of the time available to the labor carrier. Bringing our labor force to the market, we go to a kind of “compromise”, choosing between two goods: leisure and income, with which we can buy consumer goods. Leisure is necessary for recuperation, household chores, advanced training, and recreation. Therefore, the seller of labor ultimately chooses how many hours to work per day.

This choice is associated with two main limitations:

The limited time in the day to twenty-four hours, which can be divided between work and leisure;

The hourly wage rate, which determines the possible income of the seller of labor.

The hourly rate can thus be seen as the opportunity cost of labor. It is the monetary equivalent of those goods and services that an employee sacrifices to obtain the benefits of recreation.

The wage rate and its change influence the choice between work and leisure.

First, there is a substitution effect; higher wage rates increase real income and encourage people to work harder. Since each hour of free time has also become more expensive, there is an incentive to replace leisure with work time.

Second, the substitution effect is counteracted by the income effect. With higher wages, income is higher and the owner of the labor force can buy more normal goods and less goods of poor quality. At the same time, one of the normal goods is rest. If you spend more on leisure, then the income effect encourages you to work less. Thus, the income effect of the increase in wages will be expressed in a reduction in the amount of labor offered on the market. When a wage increase causes a worker to reduce their hours of work due to a large income effect, the labor supply curve slopes downward.

In general, labor supply in labor markets is formed under the influence of a combination of the following conditions:

total population;

Number of active able-bodied population;

Number of hours worked per year;

Qualitative parameters of labor (its qualification, productivity, specialization).

The market supply of labor consists of the proposals of individual workers.

Law of Supply: The higher the wage rate, the more workers are willing to work.

For different workers, the level of remuneration from which a person agrees to work will be different. As a result of the horizontal summation of individual labor supply curves, with an increase in the wage rate, the supply of labor will increase.

The labor supply curve of an individual firm in a competitive market is perfectly elastic, since an employer can buy any required amount of labor at fixed price(Fig. Labor market in conditions of perfect competition a) for the firm). V short term in a perfectly competitive labor market, an individual firm has no influence on the market level of wages due to an insignificant share of the labor supply to the firm in the aggregate labor market. In the market as a whole, the labor supply curve has a positive slope (Fig. Labor market under perfect competition b) for the market).

Rice. 22. Labor market in conditions of perfect competition:

a) for a company b) for the market

In reality, within the framework of the national labor market, there are many labor markets that differ by profession, region, and so on. They interact with each other and mutually influence each other.

Equilibrium in perfectly competitive labor markets is characterized by the fact that the equilibrium wage rate is equal to the marginal profitability of the resource W = MRP L and is the same for all firms in the industry. Regardless of the number of employed workers, the wage rate remains unchanged (Fig. Labor market under perfect competition a) for the firm). Since the supply of labor is perfectly elastic, a profit maximizing firm will hire workers until the marginal revenue from the resource becomes equal to its marginal cost: MRP L = MRC L .

A perfectly competitive market is characterized by the following features:

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

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

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

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

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

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

However, the perfect competition model:

• allows you to explore markets in which a large number of small firms sell homogeneous products, i.e. markets similar in terms of conditions to this model;

• clarifies the conditions for profit maximization;
• is the standard for evaluating the performance of the real economy.

Short-run equilibrium of a firm under perfect competition

Demand for a perfect competitor's product

Under perfect competition, the prevailing market price is established by the interaction of market demand and market supply, as shown in Fig. 1 and defines the horizontal demand curve and average income (AR) for each individual firm.

Rice. 1. The demand curve for the products of a competitor

Due to the homogeneity of products and the presence of a large number of perfect substitutes, no firm can sell its product at a price even slightly higher than the equilibrium price, Pe. On the other hand, an individual firm is very small compared to the aggregate market, and it can sell all its output at the price Pe, i.e. she has no need to sell the commodity at a price below Re. Thus, all firms sell their products at the market price Pe, determined by market demand and supply.

Income of a firm that is a perfect competitor

The horizontal demand curve for the products of an individual firm and the single market price (Pe=const) predetermine the shape of the income curves under perfect competition.

1. Total income () - the total amount of income received by the company from the sale of all its products,

represented on the graph by a linear function with a positive slope and originating at the origin, since any sold unit of output increases the volume by an amount equal to the market price!!Re??.

2. Average income () - income from the sale of a unit of production,

is determined by the equilibrium market price!!Re??, and the curve coincides with the firm's demand curve. By definition

3. Marginal income () - additional income from the sale of one additional unit of output,

Marginal revenue is also determined by the current market price for any amount of output.

By definition

All income functions are shown in Fig. 2.

Rice. 2. Competitor's income

Determination of the optimal output volume

Under perfect competition, the current price is set by the market, and an individual firm cannot influence it, since it is price taker. In these conditions the only way increasing profits is to regulate the volume of output.

Based on the current market and technological conditions, the firm determines optimal output volume, i.e. the volume of output that provides the firm profit maximization(or minimization if profit is not possible).

There are two interrelated methods for determining the optimum point:

1. The method of total costs - total income.

The firm's total profit is maximized at the level of output where the difference between and is as large as possible.

n=TR-TC=max

Rice. 3. Determination of the point of optimal production

On fig. 3, the optimizing volume is at the point where the tangent to the TC curve has the same slope as the TR curve. The profit function is found by subtracting TC from TR for each output. The peak of the total profit curve (p) shows the volume of output at which profit is maximized in the short run.

From the analysis of the function of total profit, it follows that total profit reaches its maximum at the volume of production at which its derivative is equal to zero, or

dp/dQ=(p)`= 0.

The derivative of the total profit function has a strictly defined economic sense is the marginal profit.

marginal profit ( MP) shows the increase in total profit with a change in output per unit.

• If Mn>0, then the total profit function grows, and additional production can increase the total profit.
• If Mn<0, то функция совокупной прибыли уменьшается, и дополнительный выпуск сократит совокупную прибыль.
• And, finally, if Мп=0, then the value of the total profit is maximum.

From the first profit maximization condition ( MP=0) the second method follows.

2. The method of marginal cost - marginal income.

• Мп=(п)`=dп/dQ,
• (n)`=dTR/dQ-dTC/dQ.

And since dTR/dQ=MR, a dTC/dQ=MC, then total profit reaches its maximum value at such a volume of output at which marginal cost equals marginal revenue:

If marginal cost is greater than marginal revenue (MC>MR), then the company can increase profits by reducing production. If marginal cost is less than marginal revenue (MC<МR), то прибыль может быть увеличена за счет расширения производства, и лишь при МС=МR прибыль достигает своего максимального значения, т.е. устанавливается равновесие.

This equality valid for any market structures, however, in conditions of perfect competition, it is somewhat modified.

Since the market price is identical to the average and marginal income of a firm that is a perfect competitor (РAR=MR), then the equality marginal cost and marginal revenue is transformed into the equality of marginal cost and price:

Example 1. Finding the optimal volume of output in conditions of perfect competition.

The firm operates under perfect competition. Current market price Р=20 c.u. The total cost function has the form TC=75+17Q+4Q2.

It is required to determine the optimal output volume.

Solution (1 way):

To find the optimal volume, we calculate MC and MR, and equate them to each other.

• 1. MR=P*=20.
• 2. MS=(TC)`=17+8Q.
• 3.MC=MR.
• 20=17+8Q.
• 8Q=3.
• Q=3/8.

Thus, the optimal volume is Q*=3/8.

Solution (2 way):

The optimal volume can also be found by equating the marginal profit to zero.

• 1. Find the total income: TR=P*Q=20Q
• 2. Find the function of total profit:
• n=TR-TC,
• n=20Q-(75+17Q+4Q2)=3Q-4Q2-75.
• 3. We define the marginal profit function:
• Mn=(n)`=3-8Q,
• and then equate Mn to zero.
• 3-8Q=0;
• Q=3/8.

Solving this equation, we got the same result.

Short-term benefit condition

The total profit of the enterprise can be estimated in two ways:

• P=TR-TC;
• P=(P-ATS)Q.

If we divide the second equality by Q, then we get the expression

characterizing the average profit, or profit per unit of output.

It follows that a firm's profit (or loss) in the short run depends on the ratio of its average total cost (ATC) at the point of optimal production Q* and the current market price (at which the firm, a perfect competitor, is forced to trade).

The following options are possible:

if P*>ATC, then the firm has a positive short-term economic profit;

Positive economic profit

In the figure, total profit corresponds to the area of ​​the shaded rectangle, and average profit (ie profit per unit of output) is determined by the vertical distance between P and ATC. It is important to note that at the optimum point Q*, when MC=MR, and the total profit reaches its maximum value, n=max, the average profit is not maximum, since it is determined not by the ratio of MC and MR, but by the ratio of P and ATC.

if R*<АТС, то фирма имеет в краткосрочном периоде отрицательную экономическую прибыль (убытки);

Negative economic profit (loss)

if P*=ATC, then economic profit is zero, production is breakeven, and the firm earns only normal profit.

Zero economic profit

Termination Condition

In conditions when the current market price does not bring positive economic profit in the short term, the firm faces a choice:

• or continue unprofitable production,
• or temporarily suspend its production, but incur losses in the amount of fixed costs ( FC) production.

The firm makes a decision on this issue based on the ratio of its average variable cost (AVC) and market price.

When a firm decides to close, its total earnings ( TR) fall to zero, and the resulting losses become equal to its total fixed costs. Therefore, until price is greater than average variable cost

P>AVC,

firm production should continue. In this case, the income received will cover all the variables and at least part of the fixed costs, i.e. losses will be less than at closing.

If price equals average variable cost

then from the point of view of minimizing losses to the firm indifferent, continue or stop its production. However, most likely the company will continue its activities in order not to lose its customers and keep the jobs of employees. At the same time, its losses will not be higher than at closing.

And finally, if prices are less than average variable costs the firm should cease operations. In this case, she will be able to avoid unnecessary losses.

Production termination condition

Let us prove the validity of these arguments.

By definition, n=TR-TS. If a firm maximizes its profit by producing the nth number of products, then this profit ( n) must be greater than or equal to the profit of the firm under the conditions of closing the enterprise ( on), because otherwise the entrepreneur will immediately close his enterprise.

In other words,

Thus, the firm will continue to operate only as long as the market price is greater than or equal to its average variable cost. Only under these conditions, the firm minimizes its losses in the short run, continuing to operate.

Intermediate conclusions for this section:

Equality MS=MR, as well as the equality MP=0 show the optimal output volume (i.e., the volume that maximizes profits and minimizes losses for the firm).

The ratio between the price ( R) and average total cost ( ATS) shows the amount of profit or loss per unit of output while continuing production.

The ratio between the price ( R) and average variable costs ( AVC) determines whether or not to continue activities in the event of unprofitable production.

Competitor's short run supply curve

By definition, supply curve reflects the supply function and shows the amount of goods and services that producers are willing to supply to the market at given prices, at a given time and place.

To determine the short-run supply curve of a perfectly competitive firm,

Competitor's supply curve

Let's assume that the market price is Ro, and the average and marginal cost curves look like those in Fig. 4.8.

Insofar as Ro(closing points), then the volume of supply of the firm zero. If the market price rises to a higher level, then the equilibrium output will be determined by the relation MC and MR. The very point of the supply curve ( Q;P) will lie on the marginal cost curve.

By consistently raising the market price and connecting the resulting points, we get a short-run supply curve. As can be seen from the presented Fig. 4.8, for a firm-perfect competitor, the short-run supply curve coincides with its marginal cost curve ( MS) above the minimum level of average variable costs ( AVC). At lower than min AVC level of market prices, the supply curve coincides with the price axis.

Example 2: Defining a sentence function

It is known that a firm-perfect competitor has total (TC), total variable (TVC) costs represented by the following equations:

• TS=10+6 Q-2 Q 2 +(1/3) Q 3 , where TFC=10;
• TVC=6 Q-2 Q 2 +(1/3) Q 3 .

Determine the firm's supply function under perfect competition.

1. Find MS:

MS=(TC)`=(VC)`=6-4Q+Q 2 =2+(Q-2) 2 .

2. Equate MC to the market price (condition of market equilibrium under perfect competition MC=MR=P*) and get:

2+(Q-2) 2 = P or

Q=2(P-2) 1/2 , if R2.

However, we know from the preceding material that the supply quantity Q=0 for P

Q=S(P) at Pmin AVC.

3. Determine the volume at which the average variable costs minimal:

• min AVC=(TVC)/ Q=6-2 Q+(1/3) Q 2 ;
• (AVC)`= dAVC/ dQ=0;
• -2+(2/3) Q=0;
• Q=3,

those. average variable costs reach their minimum at a given volume.

4. Determine what min AVC equals by substituting Q=3 into the min AVC equation.

• min AVC=6-2(3)+(1/3)(3) 2 =3.

5. Thus, the firm's supply function will be:

• Q=2+(P-2) 1/2 ,if P3;
• Q=0 if R<3.

Long-run market equilibrium under perfect competition

Long term

So far, we have considered the short-term period, which involves:

• the existence of a constant number of firms in the industry;
• enterprises have a certain amount of permanent resources.

In the long term:

• all resources are variable, which means the possibility for a firm operating in the market to change the size of production, introduce new technology, modify products;
• a change in the number of enterprises in the industry (if the profit received by the firm is below normal and negative forecasts for the future prevail, the enterprise may close and leave the market, and vice versa, if the profit in the industry is high enough, an influx of new companies is possible).

Main assumptions of the analysis

To simplify the analysis, suppose that the industry consists of n typical enterprises with same cost structure, and that the change in the output of incumbent firms or the change in their number do not affect resource prices(we will remove this assumption later).

Let the market price P1 determined by the interaction of market demand ( D1) and market supply ( S1). The cost structure of a typical firm in the short run has the form of curves SATC1 and SMC1(Fig. 4.9).

Rice. 9. Long run equilibrium of a perfectly competitive industry

The mechanism of formation of long-term equilibrium

Under these conditions, the firm's optimal output in the short run is q1 units. The production of this volume provides the company positive economic profit, since the market price (P1) exceeds the firm's average short-term cost (SATC1).

Availability short-term positive profit leads to two interrelated processes:

• on the one hand, the company already operating in the industry seeks to expand your production and receive economies of scale in the long run (according to the LATC curve);
• on the other hand, external firms will begin to show interest in penetration into the industry(depending on the value of economic profit, the penetration process will proceed at different speeds).

The emergence of new firms in the industry and the expansion of the activities of old ones shifts the market supply curve to the right to the position S2(as shown in Fig. 9). The market price falls from P1 before R2, and the equilibrium volume of industry output will increase from Q1 before Q2. Under these conditions, the economic profit of a typical firm falls to zero ( P=SATC) and the process of attracting new companies to the industry is slowing down.

If for some reason (for example, the extreme attractiveness of initial profits and market prospects) a typical firm expands its production to the level q3, then the industry supply curve will shift even more to the right to the position S3, and the equilibrium price falls to the level P3, lower than min SATC. This will mean that firms will no longer be able to extract even normal profits and a gradual outflow of companies in more profitable areas of activity (as a rule, the least efficient ones leave).

The rest of the enterprises will try to reduce their costs by optimizing the size (i.e., by some reduction in the scale of production to q2) to a level at which SATC=LATC, and it is possible to obtain a normal profit.

Shifting the industry supply curve to the level Q2 cause the market price to rise to R2(equal to the minimum long-run average cost, P=min LAC). At a given price level, the typical firm earns no economic profit ( economic profit is zero, n=0), and is only able to extract normal profit. Consequently, the motivation for new firms to enter the industry disappears and a long-term equilibrium is established in the industry.

Consider what happens if the equilibrium in the industry is disturbed.

Let the market price ( R) has settled below the average long run cost of a typical firm, i.e. P. Under these conditions, the firm begins to incur losses. There is an outflow of firms from the industry, a shift in market supply to the left, and while maintaining market demand unchanged, the market price rises to the equilibrium level.

If the market price ( R) is set above the average long run costs of a typical firm, i.e. P>LATC, then the firm begins to earn a positive economic profit. New firms enter the industry, market supply shifts to the right, and with market demand unchanged, price falls to the equilibrium level.

Thus, the process of entry and exit of firms will continue until a long-term equilibrium is established. It should be noted that in practice, the regulatory forces of the market work better for expansion than for contraction. Economic profit and freedom to enter the market actively stimulate an increase in the volume of industry production. On the contrary, the process of squeezing firms out of an over-expanded and unprofitable industry takes time and is extremely painful for participating firms.

Basic conditions for long-run equilibrium

• Operating firms make the best use of the resources at their disposal. This means that each firm in the industry maximizes its profit in the short run by producing the optimal output at which MR=SMC, or since the market price is identical to marginal revenue, P=SMC.
• There are no incentives for other firms to enter the industry. The market forces of supply and demand are so strong that firms are unable to extract more than is necessary to keep them in the industry. those. economic profit is zero. This means that P=SATC.
• In the long run, firms in an industry cannot reduce total average costs and profit by scaling up production. This means that in order to earn a normal profit, a typical firm must produce a volume of output corresponding to a minimum of average long-term total costs, i.e. P=SATC=LATC.

In conditions long run equilibrium consumers pay the lowest economically possible price, i.e. the price required to cover all production costs.

Market supply in the long run

The individual firm's long-run supply curve coincides with the rising leg of the LMC above min LATC. However, the market (industry) supply curve in the long run (as opposed to the short run) cannot be obtained by horizontally summing the supply curves of individual firms, since the number of these firms varies. The shape of the market supply curve in the long run is determined by how resource prices change in the industry.

At the beginning of the section, we introduced the assumption that changes in industry output do not affect resource prices. In practice, there are three types of industries:

• with fixed costs
• with increasing costs
• with decreasing costs.

Industries with fixed costs

The market price will rise to P2. The optimal output of an individual firm will be equal to Q2. Under these conditions, all firms will be able to earn economic profits by inducing other firms to enter the industry. The industry short-run supply curve shifts to the right from S1 to S2. The entry of new firms into the industry and the expansion of industry output will not affect resource prices. The reason for this may lie in the abundance of resources, so that new firms will not be able to influence the prices of resources and increase the costs of existing firms. As a result, the typical firm's LATC curve will remain the same.

Rebalancing is achieved according to the following scheme: the entry of new firms into the industry causes the price to fall to P1; profits are gradually reduced to the level of normal profit. Thus, industry output increases (or decreases) following a change in market demand, but the supply price in the long run remains unchanged.

This means that a fixed cost industry is a horizontal line.

Industries with rising costs

If an increase in industry volume causes an increase in resource prices, then we are dealing with the second type of industry. The long-term equilibrium of such an industry is shown in Fig. 4.9 b.

A higher price allows firms to earn economic profits, which attracts new firms to the industry. The expansion of aggregate production necessitates an ever wider use of resources. As a result of competition between firms, resource prices increase, and as a result, the costs of all firms (both existing and new ones) in the industry increase. Graphically, this means an upward shift in the marginal and average cost curves of the typical firm from SMC1 to SMC2, from SATC1 to SATC2. The short run firm's supply curve also shifts to the right. The adjustment process will continue until economic profits dry up. On fig. 4.9 the new equilibrium point will be the price P2 at the intersection of the demand curves D2 and supply S2. At this price, the typical firm chooses the output at which

P2=MR2=SATC2=SMC2=LATC2.

The long run supply curve is obtained by connecting short run equilibrium points and has a positive slope.

Industries with diminishing costs

Analysis of the long-term equilibrium of industries with decreasing costs is carried out according to a similar scheme. Curves D1,S1 - the initial curves of market demand and supply in the short term. P1 is the initial equilibrium price. As before, each firm reaches equilibrium at the point q1, where the demand curve - AR-MR touches min SATC and min LATC. In the long run, market demand increases, i.e. the demand curve shifts to the right from D1 to D2. The market price rises to a level that allows firms to earn economic profits. New companies begin to flow into the industry, and the market supply curve shifts to the right. The expansion of production leads to lower prices for resources.

This is a rather rare situation in practice. An example is a young industry emerging in a relatively undeveloped area where the resource market is poorly organized, marketing is primitive, and the transportation system is poorly functioning. An increase in the number of firms can increase the overall efficiency of production, stimulate the development of transport and marketing systems, and reduce the overall costs of firms.

External savings

Due to the fact that an individual firm cannot control such processes, this kind of cost reduction is called foreign economy(English external economies). It is caused solely by the growth of the industry and by forces beyond the control of the individual firm. External economies should be distinguished from the already known internal economies of scale, achieved by increasing the scale of the firm and completely under its control.

Taking into account the factor of external savings, the function total costs individual firm can be written as follows:

TCi=f(qi,Q),

where qi- the volume of output of an individual firm;

Q is the output of the entire industry.

In industries with fixed costs, there are no external economies; the cost curves of individual firms do not depend on the output of the industry. In industries with increasing costs, there is negative external diseconomies, the cost curves of individual firms shift upwards with an increase in output. Finally, in industries with decreasing costs, there is a positive external economy that offsets internal uneconomics due to diminishing returns to scale, so that the cost curves of individual firms shift downward as output increases.

Most economists agree that in the absence of technological progress, industries with increasing costs are most typical. Industries with diminishing costs are the least common. As industries with decreasing and fixed costs grow and mature, they are more likely to become industries with increasing costs. On the contrary, technological progress can neutralize the rise in resource prices and even cause them to fall, resulting in a downward long-run supply curve. An example of an industry in which costs are reduced as a result of scientific and technical progress is the production of telephone services.