Types of market structures: perfect competition, monopolistic competition, oligopoly and monopoly. Perfect Competition An example of a perfectly competitive market is

Perfect Competition

Model Plot

Perfect, free or pure competition- an economic model, an idealized state of the market, when individual buyers and sellers cannot influence the price, but form it with their contribution of supply and demand. In other words, this is a type of market structure where the market behavior of sellers and buyers is to adapt to the equilibrium state of market conditions.

Features of perfect competition:

• an infinite number of equal sellers and buyers
• homogeneity and divisibility of products sold
• no barriers to entry or exit from the market
• high mobility of factors of production
• equal and full access of all participants to information (prices of goods)

In the case when at least one feature is absent, competition is called imperfect. In the case when these signs are artificially removed in order to occupy a monopoly position in the market, the situation is called unfair competition.

In some countries, one of the widely used types of unfair competition is the giving of bribes, explicitly and implicitly, to various representatives of the state in exchange for various kinds of preferences.

David Ricardo revealed a natural tendency in conditions of perfect competition to reduce the economic profit of each of the sellers.

In a real economy, the exchange market most resembles a perfectly competitive market. In the course of observing the phenomena of economic crises, it was concluded that this form of competition usually fails, from which it is possible to get out only thanks to external intervention.

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See what "Perfect Competition" is in other dictionaries:

The idealized state of the commodity market, characterized by: the presence on the market of a large number of independent entrepreneurs (sellers and buyers); the opportunity for them to freely enter and leave the market; equal access to ... ... Financial vocabulary

- (perfect competition) The ideal state of the market, in which there are many sellers and buyers with equal access to information, so that each of them can act as a person who agrees with a given price, and is ready to sell and receive any ... ... Economic dictionary

See Perfect Competition Glossary of business terms. Akademik.ru. 2001 ... Glossary of business terms

PERFECT COMPETITION- (perfect competition) (Political economy) the concept of an ideal type of free market in which (a) there are many buyers and many sellers, (b) commodity units are homogeneous, (c) the purchases of any buyer do not noticeably affect the market ... ... Big explanatory sociological dictionary

Perfect Competition- 1) the functioning of the market mechanism in the presence of a large number of sellers, high quality goods, no restrictions on new production in conditions of full awareness of consumers and producers about market conditions. ... ... Dictionary of Economic Theory

perfect competition- competition between producers, sellers of goods, which takes place in the so-called ideal market, where an unlimited number of sellers and buyers of a homogeneous product are represented, freely communicating with each other. Really like this.... Dictionary of economic terms

- (see PERFECT COMPETITION) ... Encyclopedic Dictionary of Economics and Law

Perfect Competition- Idealized market conditions, in which each market participant is too small to influence the market price of shares by their actions ... Investment dictionary

Perfect Competition- type of market, characterized by the presence of a large number of sellers offering homogeneous products; each individual seller cannot have any influence on the market price of products; free access to the market... Economics: glossary

Perfect Competition- a kind of rivalry in the market of homogeneous products, where there are many sellers and buyers, and none of them individually can influence market prices and does not have full knowledge of the state of the market ... Dictionary of economic terms and foreign words

Books

• A set of tables. Economy. 10-11 grade (25 tables), . Human needs. Limited economic resources. factors of production. Types of economic systems. Demand. Sentence. Market balance. Types of property. The company and its goals...

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 the cross-price elasticity of demand for any pair of firms tends to infinity:

This means that any arbitrarily small increase in the price of one producer above the market level leads to a reduction in demand for his products to zero. Thus, the difference in prices may be the only reason for preferring one or another firm. 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. In this case, of course, it is assumed that there is no collusion between sellers or buyers to obtain monopoly power in 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. Under these conditions, the only way to increase 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, but 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 revenues of a firm that is a perfect competitor (РAR=MR), then the equality of marginal costs and marginal revenues is transformed into the equality of marginal costs and prices:

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 economic profit in the short run;

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 firm's supply is 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 are 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 that the company operating in the market can 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 old firms 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 a long-term 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 industries. 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 of the total costs of an 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.

In economics, as in physics, there are various kinds of abstractions. Abstraction is something that does not exist in a “pure form” in nature. But the introduction and study of abstract concepts helps to study real objects, processes and phenomena that are close to them. So, from the school physics course, we know about the "material point" and "absolutely rigid body."

An example of an abstract concept in economics is pure or perfect (absolute) competition.

What is pure competition

Perfect competition is a model of the functioning of the economy, in which neither sellers nor buyers influence the price, but only contribute to its formation through the mechanisms of supply and demand. In other words, both parties, both the seller and the buyer, adjust to the equilibrium state of the market.

In a perfectly competitive market, there are many sellers and buyers and there is no monopoly at all.

Firms are completely free to enter and exit the market, and information about the price of a product is available to any market participant. Sellers and buyers depend on how the market develops. To maximize profits, sellers have to improve, use the achievements of scientific and technological progress not only in the process of direct production of products, but also in their sale.

The use of advanced technologies will inevitably lead to cost reduction, which means it will increase the profit of the enterprise.

We list the main properties:

• homogeneity, divisibility of products. The product of one seller may well be replaced by the product of another;
• a huge number of sellers - the entire market demand is covered not by several firms (oligopoly) or one (monopoly), but by hundreds and even thousands of similar enterprises;
• a high degree of mobility of production factors. Neither manufacturers nor sellers, much less the state, influence the formation of prices. The cost of goods depends solely on three factors: the cost of production, supply and demand;
• the absence of barriers to entry into the market or vice versa, to exit it. This feature should be understood as follows: enterprises do not require licenses or permits to start a business. Such enterprises are, for example, shoe repair shops, ateliers, etc.;
• all market participants have the same access to information about the price of goods.

Pure competition is characterized by the presence of all of the above characteristics.

Otherwise, the competition is called imperfect. One example of imperfect competition is the bribery of officials for preferences and lobbying interests.

In conditions of absolute competition, one global trend is observed - a decrease in the profits of each of the sellers. Perfect competition in its pure form is nowhere to be found. If pure competition were introduced into practice, it would quickly lead to the decline of the market. Thus, enterprises operating in the market sooner or later modernize their production base.

But, despite this, the price will continue to decline - competitors will "take bread" from each other, conquering a larger market. In such conditions, incomes will quickly be replaced by losses, and it will be possible to save the situation only with the help of external intervention (for example, state regulation).

Examples

Despite the fact that in its “pure form” market competition is not found anywhere, this market model can be used to describe the functioning of small firms - auto repair shops, photo studios, construction teams, stalls, etc. All these enterprises are united by approximately the same cost of production, the scale of activity, negligible compared to the size of the entire market, a huge number of competitors, the forced need to accept the "rules of the game" formed by the participants in this industry.

The opposite of perfect competition is monopoly.

For example, the absolute monopoly of the Russian gas sector is Gazprom. Monopolies have a negative effect on the market, since such firms do not need to invest in their development. Anyway, no one has other similar products - they will buy products under any conditions.

Usually the real market functions in some intermediate form - there are several large players, the rest of the share is distributed among small enterprises.

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What is pure competition? Description and definition of the concept.

Pure competition- these are prosperous conditions in the market, when there are many buyers and many sellers, and there is also a complete lack of monopoly.
When there is no barrier to entry or exit from the market, information about the quality and price of the product is available to all market participants.

A large number of consumers and an abundance of goods cannot affect the price and quantity of products. Both the seller and the consumer depend on the dynamics of the market.

In order to have a higher profit from the sale of products or goods, this is to use some advanced technologies, both in the manufacture of products and in their sale, which will cause a decrease in cost, and hence there will be an increase in profits.

Pure, perfect, free competition is an idealized state of the market, an economic model, when individual sellers and buyers cannot influence the price, but form it with their contribution of supply and demand. That is, it is a kind of market structure, where the market behavior of buyers and sellers lies in the adaptation to the equilibrium state of market conditions.

Let us consider, in more detail, what pure competition means.

Features of pure competition

Features of perfect competition:

• divisibility and homogeneity of products sold. It is understood that sellers or manufacturers produce such a product that can be completely replaced by products of other market participants;
• an infinite number of equal buyers and sellers. 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;
• high mobility of production factors. Neither the state, nor specific sellers or manufacturers should influence pricing. The price of goods should determine the cost of production, the level of demand, as well as supply;
• no barriers to exit or entry to the market. Examples can be a variety of small business areas where special requirements are not created and special licenses or other permits are not needed. These include: atelier, shoe repair shop and similar establishments;
• full and equal access of all participants to information (on the price of goods).

In a situation where at least one feature is missing, competition is imperfect. In a situation where these signs are removed artificially in order to occupy a monopoly position in the market, the situation is called unfair competition.

One of the widely used types of unfair competition in some countries is the giving of bribes, implicitly and explicitly, to various representatives of the state in exchange for various kinds of preferences.

David Ricardo revealed a tendency, natural in conditions of absolute competition, to reduce the economic profit of each seller.

The exchange market in a real economy is most like a market of perfect competition. The Keynesians, while observing the phenomena of economic crises, came to the conclusion that this form of competition usually fails, and the only way out of it is with the help of external intervention.

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 incentive for businesses to do this? exclusively and only market. The market, in this sense, is a competition that arises between enterprises that manufacture or sell similar products.

In the case when there is a sufficiently high level of adequate competition, this seriously affects the quality of goods or services sold on the market.

Because every manufacturer wants to be the best, so he is interested in having the highest quality products and the lowest production costs. This is a condition for existence in a competitive market.

Perfect competition in the market

Perfect competition, as mentioned above, is the absolute opposite of monopoly.

In other words, this is a market in which an unlimited number of sellers operate who sell the same or similar goods and at the same time cannot influence its final cost in any way.

The state, in turn, 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 will instantly affect the cost per unit of production (goods or services).

However, unfortunately, such ideal conditions for doing business in real market conditions cannot exist for a long time. That is, perfect competition is a fickle and temporary phenomenon. Ultimately, the market becomes either an oligopoly or some other form of imperfect competition.

Perfect competition can lead to decline. This may be due to the fact that in the long run there is a constant decrease in prices. The human resource in the world is quite large, while the technological one is very limited.

Over time, all enterprises will gradually undergo a process of modernization of all fixed production assets and all production processes, and the price will still continue to fall due to the attempts of 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 market only by outside influence.

Perfect competition is extremely rare. In the real world, it is impossible to give examples of perfectly competitive firms, since there simply is no market that functions in this way. Although there are some 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. As already mentioned, if any firm can enter the market where this segment operates, and also easily leave it, then this is a sign of perfect 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.

An entire sector of the economy can be called an example of such a market - the oil and gas industry, and Gazprom is a monopoly company. An example of a perfectly competitive market is the automotive repair industry. There are a lot of all kinds of service stations and auto repair shops, both in the city and in other settlements.

Almost everywhere the same services are provided, and approximately the same amount of work is performed. If there is perfect competition in the market, then it becomes impossible to artificially increase the prices of goods in the legal field. We see examples of this in everyday life, in ordinary markets.

For example, one fruit seller raised the price of apples by 10 rubles, although their quality is the same as that of competitors, in this case, buyers will not buy goods from him at that price. If the monopolist has influence on the price by raising or lowering it, then in this case such methods are not suitable.

Under perfect competition, it is impossible to raise the price on its own, unlike a monopoly enterprise. Because of the competition in the market, you can't just raise the price, as all customers will be looking for a better deal. Thus, an enterprise can lose its market share, and this will entail disastrous consequences.

Some people reduce the cost of the goods offered. This is done in order to “win back” new market shares and increase revenue levels. To reduce prices, it is necessary to reduce the cost of raw materials.

And this, in turn, is possible due to the use of new technologies, production optimization and other processes, which allow saving costs on raw materials. In Russia, markets that are close to perfect competition are not developing fast enough.

Examples of a perfect economy can be found in almost all areas of small business. If we talk about the domestic market, we can see that a perfect economy in it is developing at an average pace, but it could be better.

Weak support from the state significantly hinders its development, since so far many laws are focused on supporting large producers, which in turn are monopolists.

Therefore, the small business sector remains without much attention and without proper funding.

Perfect competition, examples of which are listed above, is an ideal form of competition from the understanding of pricing, supply and demand criteria. Nowadays, not a single country, not a single economy in the world, can boast of such a market that would meet absolutely all the requirements that a market must meet with perfect competition.

We briefly reviewed what pure competition is, its distinctive features, as well as examples in the world market. Leave your comments or additions to the material.

Competition(lat. concurrentia, from lat. concurro - running away, colliding) - struggle, rivalry in any area. In economics, it is a struggle between economic entities for the most efficient use of factors of production.

Competitiveness- the ability of a certain object or subject to outperform competitors in given conditions.

The lower the firm's ability to influence the market, the more competitive the industry is considered to be. In the limiting case, when the degree of influence of one firm is equal to zero, one speaks of a perfectly competitive market.

In the scientific language, there are two different understandings of the term “competition”. Competition as a characteristic of the market structure (market competitiveness, perfect, monopolistic competition) and competition as a way of interaction between firms in the market (competition, price and non-price competition).

The terms used to refer to various types of market structures come from the Greek language and characterize, on the one hand, the belonging of economic entities to sellers or buyers (poleo - sell, psoneo - buy), and on the other hand, their number (mono - one, oligos - a few, poly - a lot).

Since the structure of a particular market is determined by many factors, the number of market structures is practically unlimited.

To simplify the analysis in economic theory, it is customary to distinguish four basic models:

• perfect competition;
• pure monopoly;
• monopolistic competition;
• homogeneous and heterogeneous oligopoly

Perfect Competition

Perfect competition is a state of the market in which there are a large number of buyers and sellers (manufacturers), each of which occupies a relatively small market share and cannot dictate the conditions for the sale and purchase of goods.

It is supposed to have the necessary and accessible information about prices, their dynamics, sellers and buyers not only in this place, but also in other regions and cities.

The market of perfect competition implies the absence of the power of the producer over the market and the setting of the price not by the producer, but through the function of supply and demand.

Features of perfect competition are not inherent in any of the industries in full. All of them can only approach the model.

The features of an ideal market (market of perfect competition) are:

1. the absence of entry and exit barriers in a particular industry;
2. no restrictions on the number of market participants;
3. homogeneity of similar products presented on the market;
4. free prices;
5. lack of pressure, coercion from some participants in relation to others

Creating an ideal model of perfect competition is an extremely complex process. An example of an industry close to a perfectly competitive market is agriculture.

Imperfect Competition

Imperfect competition - competition in conditions where individual producers have the ability to control the prices of the products they produce. Perfect competition is not always possible in the market. Monopolistic competition, oligopoly and monopoly are forms of imperfect competition. With a monopoly, it is possible for the monopolist to crowd out other firms from the market.

Signs of imperfect competition are:

1. dumping prices
2. creation of entry barriers to the market of any goods
3. price discrimination (selling the same product at different prices)
4. use or disclosure of confidential scientific, technical, industrial and trade information
5. dissemination of false information in advertising or other information regarding the method and place of manufacture or quantity of goods
6. omission of important consumer information

Losses from imperfect competition:

1. unjustified price increase
2. increase in production and distribution costs
3. slowdown in scientific and technological progress
4. decrease in competitiveness in world markets
5. decline in the efficiency of the economy.

Monopoly

A monopoly is an exclusive right to something. In relation to the economy - the exclusive right to manufacture, purchase, sell, owned by one person, a certain group of persons or the state.

Arises on the basis of high concentration and centralization of capital and production. The goal is to extract ultra-high profits. Provided by setting monopoly high or monopoly low prices.

Suppresses the competitive potential of the market economy, leads to higher prices and disproportions.

Monopoly Model:

• sole seller;
• lack of close substitute products;
• dictated price.

It is necessary to distinguish between natural monopoly, that is, structures whose demonopolization is either impractical or impossible: public utilities, the subway, energy, water supply, etc.

Monopolistic competition

Monopolistic competition occurs when many sellers compete to sell a differentiated product in a market where new sellers can enter.

A market with monopolistic competition is characterized by the following:

1. the product of each firm trading in the market is an imperfect substitute for the product sold by other firms;
2. there are a relatively large number of sellers in the market, each of which satisfies a small but not microscopic share of the market demand for a common type of product sold by the firm and its rivals;
3. sellers in the market do not consider the reaction of their rivals when choosing what price to set their goods or when choosing annual sales targets;
4. the market has conditions for entry and exit

Monopolistic competition is similar to a monopoly situation in that individual firms have the ability to control the price of their goods. It is also similar to perfect competition, since each product is sold by many firms, and there is free entry and exit in the market.

Oligopoly

Oligopoly is a type of market in which not one, but several firms dominate each sector of the economy. In other words, there are more producers in an oligopolistic industry than in a monopoly, but significantly fewer than in a perfect competition.

As a rule, there are 3 or more participants. A special case of an oligopoly is a duopoly. Price controls are very high, barriers to entry into the industry are high, and there is significant non-price competition. Examples include mobile operators and the housing market.

Antitrust policy

In all developed countries of the world there is antimonopoly legislation that restricts the activities of monopolies and their associations.

The antimonopoly policy in European countries is more aimed at regulating already established monopolies, regardless of how they achieved their monopoly position, and this regulation does not imply structural changes, that is, it does not contain requirements for deconcentration, splitting firms into independent enterprises.

First of all, and of course, the US state antimonopoly policy is characterized by such a position, according to which it is not at all necessary to deprive a company of monopoly high profits if it has achieved a monopoly position in the market "due to superior business qualities, ingenuity, or simply a lucky chance."

In addition to price regulation, reforming the structure of natural monopolies can also bring certain benefits - especially in Russia.

The fact is that in Russia, within the framework of a single corporation, both the production of natural monopoly goods and the production of goods that are more efficient to produce under competitive conditions are often combined.

This association is, as a rule, the nature of vertical integration. As a result, a giant monopoly is formed, representing a whole sphere of the national economy.

In general, the system of antimonopoly regulation in Russia is still in its infancy and requires radical improvement. In Russia, the body of antimonopoly regulation is the Federal Antimonopoly Service of Russia.

Objects with competitiveness can be divided into four groups:

• goods,
• enterprises (as producers of goods),
• industries (as a set of enterprises offering goods or services),
• regions (districts, regions, countries or their groups).

In this regard, it is customary to talk about its types such as:

• National Competitiveness
• Product competitiveness
• Enterprise competitiveness

In addition, it is fundamentally possible to distinguish four types of subjects that evaluate the competitiveness of certain objects:

• consumers,
• manufacturers,
• investors,
• state.

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Perfect and imperfect competition: essence and characteristics

Evgeny Malyar

# business vocabulary

In reality, competition is always imperfect, and is divided into types, depending on which condition corresponds to the market to a greater extent.

• Characteristics of perfect competition
• Signs of perfect competition
• Conditions close to perfect competition
• Advantages and disadvantages of perfect competition
• Advantages
• disadvantages
• perfect competition market
• Imperfect Competition
• Signs of imperfect competition
• Types of imperfect competition

Everyone is familiar with the concept of economic competition. This phenomenon is observed at the macroeconomic and even household level. Every day, choosing this or that product in the store, every citizen, willingly or not, participates in this process. And what is the competition, and, finally, what is it in general from a scientific point of view?

Characteristics of perfect competition

To begin with, a general definition of competition must be adopted. Regarding this objectively existing phenomenon, accompanying economic relations from the moment of their inception, various concepts have been put forward, from the most enthusiastic to completely pessimistic.

According to Adam Smith, expressed in his Inquiries into the Nature and Causes of the Wealth of Nations (1776), competition with its "invisible hand" transforms the selfish motives of the individual into socially useful energy. The theory of a self-regulating market assumes the denial of any state intervention in the natural course of economic processes.

John Stuart Mill, who was also a great liberal and a supporter of maximum individual economic freedom, was more cautious in his judgments, comparing competition with the sun. Probably, this eminent scientist also understood that on a too hot day a little shade is also a blessing.

Any scientific concept involves the use of idealized tools. Mathematicians refer to this as having no width "line" or dimensionless (infinitely small) "point". Economists have a concept of perfect competition.

Definition: Competition is the competitive interaction of market participants, each of which seeks to obtain the greatest profit.

As in any other science, in economic theory a certain ideal model of the market is adopted, which does not fully correspond to the realities, but allows one to study the ongoing processes.

Signs of perfect competition

The description of any hypothetical phenomenon requires criteria to which a real object should (or can) aspire. For example, doctors consider a healthy person with a body temperature of 36.6 ° and a pressure of 80 to 120. Economists, listing the features of perfect competition (also called pure competition), also rely on specific parameters.

The reasons why it is impossible to achieve the ideal are not important in this case - they are inherent in human nature itself. Each entrepreneur, receiving certain opportunities to assert their positions in the market, will definitely use them. However, hypothetical Perfect competition is characterized by the following features:

• An infinite number of equal participants, which are understood as sellers and buyers. The convention is obvious - nothing limitless exists within our planet.
• None of the sellers can influence the price of the product. In practice, there are always the most powerful participants capable of carrying out commodity interventions.
• The proposed commercial product has the properties of uniformity and divisibility. Also purely theoretical. An abstract commodity is something like grain, but even it can be of different quality.
• Complete freedom of participants to enter or leave the market. In practice, this is sometimes observed, but by no means always.
• Possibility of problem-free movement of production factors. Imagine, for example, a car factory that can be easily transferred to another continent, of course, you can, but this requires imagination.
• The price of a product is formed solely by the ratio of supply and demand, without the possibility of influence of other factors.
• And, finally, the complete public availability of information about prices, costs and other information, in real life, most often constituting a trade secret. There are no comments here at all.

After considering the above features, the conclusions are:

1. Perfect competition in nature does not exist and cannot even exist.
2. The ideal model is speculative and necessary for theoretical market research.

Conditions close to perfect competition

The practical utility of the concept of perfect competition lies in the ability to calculate the optimal equilibrium point of the firm, taking into account only three indicators: price, marginal cost and minimum total cost.

If these figures are equal to each other, the manager gets an idea of ​​​​the dependence of the profitability of his enterprise on the volume of production.

This intersection point is visually illustrated by a graph on which all three lines converge:

Where: S is the amount of profit; ATC is the minimum gross cost; A is the equilibrium point; MC is the marginal cost; MR is the market price of the product;

Q is the volume of production.

Advantages and disadvantages of perfect competition

Since perfect competition as an ideal phenomenon in the economy does not exist, its properties can only be judged by individual features that manifest themselves in some cases from real life (at the maximum possible approximation). Speculative reasoning will also help to determine its hypothetical advantages and disadvantages.

Advantages

Ideally, such competitive relations could contribute to the rational distribution of resources and the achievement of the greatest efficiency in production and commercial activities.

The seller is forced to reduce costs, since the competitive environment does not allow him to raise the price.

In this case, new economical technologies, high organization of labor processes and all-round thrift can serve as means of achieving advantages.

In part, all this is observed in real conditions of imperfect competition, but there are examples of a literally barbaric attitude towards resources on the part of monopolies, especially if state control is weak for some reason.

An illustration of the predatory attitude to resources can be the activities of the United Fruit company, which for a long time ruthlessly exploited the natural resources of the countries of South America.

disadvantages

It should be understood that even in its ideal form, perfect (aka pure) competition would have systemic flaws.

• First, its theoretical model does not provide for economically unjustified spending on achieving public goods and raising social standards (these costs do not fit into the scheme).
• Secondly, the consumer would be extremely limited in the choice of a generalized product: all sellers offer in fact the same thing and at about the same price.
• Third, an infinitely large number of producers leads to a low concentration of capital. This makes it impossible to invest in large-scale resource-intensive projects and long-term scientific programs, without which progress is problematic.

Thus, the position of the firm under conditions of pure competition, as well as the position of the consumer, would be very far from ideal.

perfect competition market

The closest to the idealized model at the present stage is the exchange type of the market. Its participants do not have bulky and inert assets, they easily enter and leave the business, their product is relatively homogeneous (estimated by quotations).

There are many brokers (although their number is not infinite) and they operate mainly with supply and demand values. However, the economy does not consist of exchanges alone.

In reality, competition is imperfect, and is divided into types, whichever condition suits the market best.

Profit maximization in conditions of perfect competition is achieved exclusively by price methods.

The characteristics and model of the market are important for determining the possibilities of functioning in conditions of imperfect competition. It is hard to imagine that a huge number of sellers offer absolutely the same type of product, which is in demand among an unlimited number of buyers. This is the ideal picture, suitable only for conceptual reasoning.

In the real world, competition is always imperfect. At the same time, there is only one common feature of the markets of perfect and monopolistic competition (the most common) and it consists in the competitive nature of the phenomenon.

There is no doubt that business entities seek to achieve advantages, take advantage of them and develop success up to full mastery of all possible sales volumes.

In all other respects, perfect competition and monopoly differ significantly.

Signs of imperfect competition

Since the ideal model of "capitalist competition" has been discussed above, it remains to analyze its differences with what happens in a functioning world market. The main signs of real competition include the following points:

1. The number of producers is limited.
2. Barriers, natural monopolies, fiscal and licensing restrictions objectively exist.
3. Market entry can be difficult. Exit too.
4. Products are produced in a variety of quality, price, consumer properties and other characteristics. However, they are not always separable. Is it possible to build and sell half of a nuclear reactor?
5. Mobility of production takes place (in particular, towards cheap resources), but the processes of moving capacities themselves are very costly.
6. Individual participants have the opportunity to influence the market price of the product, including non-economic methods.
7. Technology and pricing information is not public.

From this list it is clear that the real conditions of the modern market are not only far from the ideal model, but most often contradict it.

Types of imperfect competition

Like any non-ideal phenomenon, imperfect competition is characterized by a variety of forms. Until recently, economists simplistically divided them according to the principle of functioning into three categories: monopoly, oligopolistic and monopolistic, but now two more concepts have been introduced - oligopsony and monopsony.

These models and types of imperfect competition deserve detailed consideration.

Monopsony

This type of imperfect competition occurs when only one consumer can purchase a manufactured product.

There are types of products intended, for example, exclusively for state structures (powerful weapons, special equipment). In economic terms, monopsony is the opposite of monopoly.

This is a kind of dictate of a single buyer (and not a manufacturer), and it is not common.

There is also a phenomenon in the labor market. When only one, for example, a factory operates in a city, then the average person has limited opportunities to sell his labor.

Oligopsony

It is very similar to monopsony, but there is a choice of buyers, albeit small. Most often, such imperfect competition occurs between manufacturers of components or ingredients intended for large consumers.

For example, some recipe component can only be sold to a large confectionery factory, and there are only a few of them in the country.

Another option - a tire manufacturer seeks to interest one of the car factories for the regular supply of its products.

As a result, we note: any competition that exists in real conditions is as imperfect as the market itself. From the point of view of economic theory, perfect competition is a simplified concept. It is far from ideal, but necessary. Doesn't it surprise anyone that physicists use different mathematical models and scientific assumptions?

Imperfect competition is diverse in forms, and it is possible that new ones will be added to its already existing types in the future.

Perfect Competition

Competition is the basic concept of economics. It refers to the rivalry of subjects (companies, organizations, firms or individuals) in any segment of the economy in order to capture the market and make a profit.

Economists distinguish two types of competition:

Perfect
Imperfect (monopolistic, oligopoly and absolute monopoly).

The article discusses perfect competition in detail.

Definition of perfect competition

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.

Necessary Conditions for Perfect Competition

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.

Perfect competition. Examples of perfect competition

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.

Perfect competition can lead to decline

This is due to the fact that in the long run there is a constant decrease in prices. 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 goods should determine the cost of production, the level of demand, as well as supply;

– there should be no barriers to entry or entry into the market of perfect competition. 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 price level, which is established by non-market means. 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, under a monopoly, a monopolist 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 only possible through the introduction of new technologies, production optimization 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 such a market that would meet all the requirements that must be observed under perfect competition.

No related posts.

The perfect competition market model is based on four basic conditions (Fig. 1.1). Let's consider them sequentially.

Rice. 1.1. Conditions for perfect competition

1.product homogeneity. This means that the products of firms in the view of buyers are homogeneous and indistinguishable, i.e. these products of different enterprises are completely interchangeable (they are complete substitute goods). More strictly, the concept of product homogeneity can be expressed in terms of the cross-price elasticity of demand for these goods. For any pair of manufacturing enterprises, it should be close to infinity. The economic meaning of this provision is as follows: goods are so similar to each other that even a small price increase by one manufacturer leads to a complete switch in demand for the products of other enterprises.

Under these conditions, no buyer will be willing to pay any particular firm a higher price than he would pay its competitive firm. After all, the goods are the same, customers do not care which company they buy from, and they, of course, opt for cheaper ones. The condition of product homogeneity actually means that the price difference is the only reason why a buyer can choose one seller over another.

2. Under perfect competition, neither sellers nor buyers affect the market situation due to the small size of the firm, the multiplicity of market participants. Sometimes both of these features 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.

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, but the decision to lower or increase their volumes does not create either surpluses or shortages of goods. The aggregate size of supply and demand simply "does not notice" such small changes.

All these limitations (homogeneity of products, large number and small size of enterprises) actually predetermine that, under perfect competition, market entities 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.

3. An important condition for perfect competition is no barriers to entering and exiting the market. 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.

On the contrary, the absence of barriers typical of perfect competition or the freedom to enter and leave the market (industry) means that resources are completely mobile and move without problems from one activity 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.

4. Information about prices, technology and likely profits is freely available to everyone. Firms have the ability to quickly and rationally respond to changing market conditions by moving the resources used. There are no trade secrets, unpredictable developments, unexpected actions of competitors. Decisions are made by the firm 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.

In reality, perfect competition is quite rare and only a few of the markets come close to it (for example, the market for grain, securities, foreign currencies). For us, not only the area of ​​practical application of our knowledge (in these markets) is of significant importance, but also the fact that perfect competition is the simplest situation and provides an initial, reference model for comparing and evaluating the effectiveness of real economic processes.

What should the demand curve for the product of a perfectly competitive firm look like? Let us take into account, firstly, that the firm takes the market price, which serves as a given value for the corresponding calculations. Secondly, the firm enters the market with a very small part of the total amount of goods produced and sold by the industry. Consequently, the volume of its production will not affect the market situation in any way, and this given price level will not change with an increase or decrease in the output of this firm.

Obviously, under such conditions, the demand for the company's products will graphically look like a horizontal line (Fig. 1.2). Whether the firm produces 10 units of output, 20 or 1, the market will absorb them at the same price R.

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.

Rice. 1.2. Demand and total income curves for an individual firm under the conditions

perfect competition

The presence of perfectly elastic demand for the firm's product is considered to be a criterion for perfect competition. As soon as this 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 company to operate in the market, in particular, determines the patterns of income.

A competitive firm can occupy a variety of positions in an industry. It depends on what its costs are in relation to the market price of the good that the firm produces. In economic theory, three most common cases of the ratio of the average costs of a firm are considered AC and market price R, determining the state of the firm (obtaining excess profits, normal profits or the presence of losses), which is shown in Fig. 1.3.

In the first case (Fig. 1.3, a) we observe an unsuccessful, inefficient firm: its costs are too high compared to the price of the goods on the market, and they do not pay off. Such a firm should either modernize production and reduce costs, or leave the industry.

In case 1.3, b, the firm with the volume of production Q E reaches equality between average cost and price (AC = P), which characterizes the equilibrium of the firm in the industry. After all, the average cost function of the firm can be considered as a function of supply, and demand is a function of price. R. This is how equality between supply and demand is achieved, i.e. equilibrium. Volume of production Q E in this case is balanced. While in equilibrium, the firm earns only accounting profit, and economic profit (i.e. excess profit) is equal to zero. The presence of accounting profit provides the firm with a favorable position in the industry.

The absence of economic profit creates an incentive to search for competitive advantages, for example, the introduction of innovations, more advanced technologies, which can further reduce the company's costs per unit of output and temporarily provide excess profits.

The position of the firm receiving excess profits in the industry is shown in fig. 1.3, c. With a production volume between Q1 before Q2 the firm has an excess profit: income received from the sale of products at a price R, exceeds the firm's costs (AC< Р). It should be noted that the maximum amount of profit is achieved in the production of products in the volume Q2 The size of profit is shown on fig. 1.3, in the shaded area.

However, it is possible to determine more precisely the moment when the increase in production should be stopped so that profits do not turn into losses, as, for example, with output at the level Q3. To do this, it is necessary to compare the marginal costs of the firm MS with the market price, which for a competitive firm is also the marginal revenue MR. Recall that the income (revenue) of the firm is called payments received in its favor when selling products. Like many other indicators, economics calculates income in three varieties. Total Revenue (TR) name the total amount of revenue that the company receives. Average income (AR) reflects revenue per unit of product sold, or, equivalently, total revenue divided by the number of products sold. Finally, marginal revenue (MR) represents the additional income generated from the sale of the last unit sold.

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, namely, the price of the goods. The marginal revenue is always at the same level. So, if the price of a loaf of bread established in the market is 23 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 23 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 prices.

As for the total income (total revenue) of the enterprise, it changes in proportion to the change in output and in the same direction. That is, there is a direct, linear relationship:

If the stall in our example sold 100 loaves of 23 rubles, then its revenue, of course, will be 2300 rubles.

Rice. 1.3. The position of a competitive firm in the industry:

a - the company suffers losses;

b - obtaining a normal profit;

c - making super profits

Graphically, the curve of total (gross) income is a ray drawn through the origin with a slope:

tg=∆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.

Marginal cost reflects individual production cost each subsequent unit of goods and change faster than average costs. Therefore, the firm achieves equality MS = MR, at which profit is maximized, much earlier than average cost equals the price of the good. At the condition that marginal cost is equal to marginal revenue (MC = MR) is production optimization rule. Compliance with this rule helps the company not only maximize profit, but also minimize losses.

So, a rationally operating firm, regardless of its position in the industry (whether it suffers losses, whether it receives normal profits or excess profits), must produce only optimal production volume. This means that the entrepreneur must strive for such a volume of output at which the cost of producing the last unit of goods MS will be the same as the proceeds from the sale of that last unit MR. In other words, the optimal output is reached when the marginal cost equals the firm's marginal revenue: MS = MR. Consider this situation in Fig. 1.4, a.

Rice. 1.4. Analysis of the position of a competitive firm in the industry:

a - finding the optimal volume of output;

b - determining the profit (or loss) of a firm - a perfect competitor

In figure 1.4, but we see that for a given firm, the equality MS=MR achieved by the production and sale of the 10th unit of output. Therefore, 10 units of goods is the optimal volume of production, since this volume of output allows you to maximize profits, i.e. get all the profits in full. By producing fewer products, say five units, the firm's profit would be incomplete and we would only get a portion of the shaded figure representing profit.

It is necessary to distinguish between the profit received from the production and sale of one unit of output (for example, the fourth or fifth), and the total, total profit. When we talk about profit maximization, we are talking about getting the entire profit, i.e. total profit. Therefore, despite the fact that the maximum positive difference between MR And MS gives the production of only the fifth unit of output (see Fig. 1.4, a), we will not stop at this quantity and will continue to release. We are fully interested in all products, in the production of which MS< МR, which brings profit before MS alignment And MR. After all, the market price pays for the production costs of the seventh, and even the ninth unit of output, additionally bringing, albeit small, but still profit. So why give it up? It is necessary to refuse from losses, which in our example arise during the production of the 11th unit of output. Now the balance between marginal revenue and marginal cost is reversed: MS > MR. That is why, in order to get all the profit in full (to maximize profit), it is necessary to stop at the 10th unit of production, at which MS=MR. In this case, the possibilities for further increase in profits have been exhausted, as evidenced by this equality.

The rule of equality of marginal costs to marginal revenue considered by us underlies the principle of production optimization, which is used to determine optimal, the most profitable volume of production at any price emerging on the market.

Now we have to find out what the firm's position in the industry at optimal output: whether the firm will incur losses or make a profit. For this, let us turn to Fig. 1.4, b, where the company is shown in full: to the function MS added a graph of the average cost function AS.

Let's pay attention to what indicators are plotted on the coordinate axes. Not only the market price is plotted on the y-axis (vertically) R, equal to the marginal revenue under perfect competition, but also all types of costs (AC And MS) in terms of money. The abscissa (horizontally) always plots only the volume of output Q. To determine the amount of profit (or loss), we must perform several actions.

Step one: using the optimization rule, we determine the optimal output volume Qopt, in the production of the last unit of which equality is achieved MS = MR. On the graph, this is marked by the intersection point of functions MS And MR. From this point, we lower the perpendicular (dashed line) down to the x-axis, where we find the desired optimal output volume. For the firm in Figure 1.4, b, the equality between MS And MR achieved by the production of the 10th unit of output. Therefore, the optimal output is 10 units.

Recall that under perfect competition, a firm's marginal revenue is the same as its market price. There are many small firms in the industry and none of them individually can influence the market price, being a price taker. Therefore, for any volume of output, the firm sells each subsequent unit of output at the same price. Accordingly, the price functions R and marginal income MR match (MR = P), which saves us from looking for the optimal output price: it will always be equal to the marginal revenue from the last unit of goods.

Step two: determine the average cost AC in the production of goods in the volume Q opt . To do this, from the point Q opt , equal to 10 units, we draw a perpendicular up to the intersection with the function AU, putting a point on this curve. From the obtained point, we draw a perpendicular to the left to the y-axis, on which the amount of costs in monetary terms is plotted. Now we know what the average cost is AC optimum production volume.

Step three: determine the profit (or loss) of the firm. We have already found out what the average costs are AC for Q opt . Now it remains to compare them with the market price R, prevailing in the industry.

Remaining on the y-axis, we see that the level marked on it AC< Р. Therefore, the firm makes a profit. To determine the size of the total profit, multiply the difference between the price and the average cost (R-AS), component of profit from one unit of production, for the entire volume of the entire output Q opt:

Firm profit = (R - AC)*Qopt

Of course, we are talking about profit, provided that P > AC. If it turned out that R< АС, then we would talk about the losses of the company, the size of which is calculated according to the same formula.

In figure 1.4, b, the profit is shown as a shaded rectangle. Note that in this case, the company received not accounting, but economic or excess profits that exceed the costs of lost opportunities.

There is also another way to determine profit(or loss) of the firm. Recall what can be calculated if we know the sales volume of Qopt and the market price R? Of course, the magnitude total income:

TR = P* Qopt

Knowing the magnitude AC and output, we can calculate the value total costs:

TS = AC*Qopt

Now it is very easy to determine the value using simple subtraction profit or loss firms:

Profit (or loss) of the firm = TR - TC.

When (TR - TS) > 0 the firm is making a profit, but if (TR - TS)< 0 the firm incurs losses.

So, at the optimal output, when MS = MR, A competitive firm can make economic profits (surplus profits) or suffer losses. Why is it necessary to determine the optimal volume of output in case of losses? The fact is that if the firm produces according to the rule MS = MR, then at any (favorable or unfavorable) price that develops in the industry, it still wins.

Benefit from optimization is that if the equilibrium price in an industry is above the average cost of a perfect competitor, then the firm maximizes profit. If the equilibrium price in the market falls below average cost, then MS = MR firm minimizes losses otherwise they could be much larger.

What happens in the industry with the company in the long run? If the equilibrium price prevailing in the industry market is higher than the average cost, then firms receive excess profits, which stimulates the emergence of new firms in a profitable industry. The influx of new firms expands the industry offer. We remember that an increase in the supply of goods on the market leads to a decrease in price. Falling prices “eat up” the excess profits of firms.

Continuing to decline, the market price gradually falls below the average costs of firms in the industry. Losses appear, which “expels” unprofitable firms from the industry. Note: those firms that are not able to implement cost-cutting measures leave the industry, those. inefficient companies. Thus, the excess supply in the industry is reduced, while the price in the market begins to rise again, and the profits of companies that are able to restructure production grow.

So in the long run industry supply is changing. This happens due to an increase or decrease in the number of market participants. Prices move up and down, each time passing through a level at which they are equal to the average cost: R = AC. In this situation, firms do not incur losses, but do not receive excess profits. Such long term situation called equilibrium.

Under conditions of equilibrium, when the demand price coincides with the average cost, the firm produces products according to the optimization rule at the level MR = MS, those. produces the optimal amount of goods. In the long run, equilibrium is characterized by the fact that all the parameters of the firm coincide: AC = P = MR = MS. Since a perfect competitor always P=MR, then equilibrium condition for a competitive firm in the industry is equality AC = P = MS.

The position of a perfect competitor upon reaching equilibrium in the industry is shown in Fig. 1.5.

Rice. 1.5. The equilibrium of a firm that is a perfect competitor

In Figure 1.5, the price function (market demand) for the firm's products passes through the intersection point of the functions AC And MS. Since, under perfect competition, the firm's marginal revenue function MR coincides with the demand (or price) function, then the optimal production volume Q opt corresponds to the equality AC \u003d P \u003d MR \u003d MS, which characterizes the position of the firm in the conditions equilibrium(at point E). We see that in the conditions of long-run equilibrium, the firm does not receive any economic profit or loss.

However, what happens to the firm itself in the long term? Long term LR(from English Long-run period) fixed costs of the firm FС increase with the expansion of its production potential. In this case, changing the scale of the firm using appropriate technologies produces economies of scale. The essence of this scale effect that in the long run the average cost LRAC, having decreased after the introduction of resource-saving technologies, they cease to change and, as output grows, remain at a minimum level. Once economies of scale have been exhausted, average costs begin to rise again.

The behavior of average costs in the long run is shown in Fig. 1.6, where economies of scale are observed with an increase in production from Qa to Qb. Over the long run, the firm changes its scale in search of the best output and lowest costs. In accordance with the change in the size of the firm (volume of production capacity), its short-term costs change AS. Various options for the scale of the firm, shown in Fig. 1.6 in the form of short-term AU, give an idea of ​​how the firm's output may change in the long run LR. The sum of their minimum values ​​​​is the long-term average costs of the company - LRAC.

Rice. 1.6. Average cost of the firm in the long run - LRAC

What is the best size for a firm? Obviously, one at which the short-run average cost reaches the minimum level of the long-run average cost LRAC. After all, as a result of long-term changes in the industry, the market price is set at the level of the LRAC minimum. This is how the firm achieves long-run equilibrium. In conditions balance in the long run the minimum levels of short-term and long-term average costs of the firm are equal not only to each other, but also to the price prevailing in the market. The position of the firm in a state of long-term equilibrium is shown in Fig. 1.7.