Fundamentals of the theory of production, Equilibrium of a firm in conditions of perfect competition - Economic theory

Fundamentals of the theory of production

The subject of study of the theory of production at the enterprise level is the problems associated with the expenditure of production factors (resources) for the production of products oriented to the consumer. At the center of the mechanism of functioning of the enterprise in the conditions of the market is the achievement of a balance between supply and demand. Demand is determined by consumers based on their needs and solvency. The proposal is created by manufacturers who are guided primarily by the principle of maximizing profits and make their production plans in accordance with the needs of consumers. Enterprises tend to get as much profit as possible with a minimum of costs. They organize their production in conditions of boundless material needs of society and limited production resources. The success of an enterprise depends on how fully it can meet the needs and how much resources will be used in the production of this product.

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The microeconomic theory of production is based on the fact that the technologically effective activity of the enterprise associated with the output of products can be represented by the production function

where 0_ - the maximum possible output for a given combination of production resources x1, ha, hp.

Factors of production can only act in combination with each other, usually increasing the effectiveness of each other, competing. Demand for the factor of production depends not only on its own price, but also on the prices of all other factors. Therefore, the production process is possible only in the presence of all factors of production, i.e. resources. The efficiency of production depends on the correct combination of these resources, their proportions. Entrepreneurial talent lies in the correctness of the choice of such proportions.

The production function can be short-term: it describes a production cycle with fixed production factors from the start of production to the sale of products on the market. The long-term function takes into account the investment processes, with all resources considered as variables.

For example, consider the production function using only the two main types of resources: labor and capital. The first resource is unchanged, it will be denoted as Y, the second resource undergoes changes, it will be denoted as X. The total amount of products produced in physical terms, changing under the influence of the variable factor, is called general product (TP). The ratio of the total product to the variable factor corresponds to the average product (AP):

Limit Product (MR) is an additional output caused by adding a unit of variable factor:

Indicators of average and marginal products characterize the average and marginal productivity of variable resources, respectively,

The dynamics of the total product can be represented in the form of a graph (Figure 8.3).

Product Dynamics>

Fig. 8.3. Dynamics of a common product

The graph shows how, in conditions of decreasing productivity, assuming unchanged technology, the change in the variable factor leads first to a drastic change in the overall product (TP) in the 1st stage, then output It slows down relative to the costs in the II stage and at the third stage, the growth of costs is accompanied by a decrease in the volume of production.

Change of two factors - capital (K) and labor (b) - in all possible variants A figure called & quot; hill & quot; production (Figure 8.4).

Fig. 8.4. & quot; Hill & quot; production

Production growth curves Bb; B1b1 and La; A , 0, assume the invariance of one of the factors. & quot; Hill & quot; production consists of many curves of the level of this "hill", for example I, II, III, all points of which reflect the same level of production. In microeconomics, these curves are called isoquants (Figure 8.5). Such a graphical construction allows you to choose the optimal combination of resources for a given volume of production.


Fig. 8.5. Isoquants

In the production theory, manufacturer's optimum can be defined in two ways. The first method involves combining the resources K and b so that the equality of their weighted marginal performance is fulfilled:

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where RR - resource prices.

In the second case, the optimal combination of productive resources is observed when the marginal rate of technical replacement of the two factors and the ratio of their marginal productivity are equal

where dbk ab - infinitesimal changes of two factors.

The problem of finding the optimal combination of resources is solved taking into account the financial capabilities of the firm (budget constraint). If the amount of money C is fully spent on acquiring factors To and b at market prices PK and P1, then

This equation is graphically represented by a straight line. All these points represent combinations of factors, the full use of which leads to the same costs (Figure 8.6).

Isocost (budget line)

Fig. 8.6. Isocost (budget line)

Direct LP is called isocost, or budget line. The point E, where the isoquant is concerned with the isocost, corresponds to the equilibrium position of the producer. Taking into account that the slope of the straight line is determined by the inverse correlation of the prices of the two factors and at the point E the slope of the isoquantum and the isocost is the same, then the equality

So, the equilibrium position arises when the marginal rate of technical replacement of factors is equal to the ratio of prices to these factors. 15 In the event of an increase in production, the budget of the firm will constantly increase. If the prices for resources do not change, we get a lot of points of the optimal combination of resources. The line passing through these points is the line of development of the firm.

Equilibrium of the firm in conditions of perfect competition

The mechanism of functioning of the enterprise largely depends on the degree of development of market relations (Table 8.1). In the conditions of perfect competition, there are many firms that produce a small amount of the same product and who are not able to influence the price change and dictate their conditions to the market. The task of the firm is to increase the total revenue and reduce the cost of production. How does the company solve this problem?

Table 8.1. Types of competition


and demand
















Offer Oligopoly









The total revenue (77?) represents all income received by the firm from the sale of its products. The average revenue for (LA) is

Limit revenue (MY) is the result of the increase in total revenue as a result of an increase in production per unit:

If the product chain does not change, then the total, average and marginal revenue will be represented as follows (Figure 8.7).

In these conditions, the firm achieves its equilibrium in the event of equality of marginal revenue and marginal costs:

Firm behavior under constant prices

Fig. 8.7. Firm behavior in a price environment

Firm behavior in perfect competition

Fig. 8.8. The behavior of the firm in conditions of perfect competition

Firm behavior in the conditions of price changes:

Fig. 8.9. The firm's behavior in the face of price changes:

PBX general averages: AUS mean variables: L/C - Limit: RE - the externally priced price

Consider the equilibrium of a competitive firm in conditions of perfect competition (Figure 8.8). The profit (P) is achieved as a result of the positive difference between the general income of the firm (TR) and the total cost ( TC). With an increase in production from zero to Q, , the enterprise suffers losses, from Q., to Q, the company starts to make a profit. At the level Qs there is a maximum profit, when the marginal revenue is equal to the marginal cost. With the volume of production (& pound ;, and above the firm again peset losses.

How does the firm behave in conditions of price changes (Figure 8.9)? The increase in prices leads to an increase in production volumes, and a decrease in prices leads to a decrease in profit to zero at the point E. The production at E is a critical production: at this point minimum average costs, the market price will be equal to the average cost. With further price drop, the continuation of the firm's activity is possible only in conditions when (a) there are reserves to cover losses and (b) losses from continuing production are less than from closing.

Sometimes production can be temporarily suspended until the expected price increase soon. At In , the market price is critically low and equal to the average variable costs. Below the points In revenues will not cover variable costs. In this case, to continue production does not make sense. The In is called the enterprise shutdown point.

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