Goals and objectives solved by a company when entering the market in a short-term time interval.

The firm evaluates its behavior as a business unit by comparing different kinds income and costs. This is especially true for the behavior of a company in the short term. When entering the market, a company asks the following basic questions:

Should the product be manufactured and brought to market?

How much (what quantity) should the product be produced?

What profit or loss will the company receive upon sale? given quantity product?

The answer to the first question is yes, if as a result of the production and sale of a certain amount of products, positive economic profit , or losses, which in their magnitude will be less than fixed costs (TFC). At zero output, the firm incurs losses equal to TFC.

Answer to the second question: it is necessary to produce such a quantity of a product, the sale of which on the market provides the company with maximum profits or minimum losses.

Answer to the third question: it is necessary to consider specific situations of the relationship between income and costs in which maximizing profits or minimizing losses is possible.

9.6.Effect of scale and firm costs over a long-term time interval.

In the long run all the firm's resources are variable. The company can hire new equipment, rent new workshops, change the composition of management personnel, use new technology production.

The lack of permanent resources in the long term leads to the fact that the difference between constants and variable costs . Analysis of the long-term activities of the company is carried out through consideration of the dynamics long-run average cost(LATC). And the main goal of the company in the area of ​​costs can be considered the organization of production of the “required scale”, providing a given volume of production with minimum average costs.

Scope of the company's activities– dependence of the increase in production volume on the increase in the use of all factors of production over a long-term time interval.

Economies of scale– savings due to an increase in the scale of the firm’s activities, manifested in a reduction in long-term average costs.

To construct long-run average costs, assume that

a firm can organize production of three sizes: small, medium and large, each of which has its own short-term average cost curve (SATC1, SATC2, SATC3, respectively), as shown in Fig. 5.

Fig.5 Long-run average cost curve.

The choice of a particular project will depend on estimates of projected market demand on the company's products and on what capacity is needed to provide it.

If the forecasted demand corresponds to Q1, then the firm will prefer to create small production, since its average costs in this case will be significantly lower than at larger enterprises. As can be seen in Figure 5, ATC1(Q1)

If demand is expected to be Q2, then project 2 (medium enterprise) will be most preferable, providing lower costs, or

ATC2(Q2)

Combining the portions of the three short-run cost curves that provide the optimal production size for each output shows us long-run average cost curve companies. In Figure 5 it is represented by a solid line.

Long-Run Average Cost Curve shows the minimum cost per unit of output produced at each possible output level.

If the number of possible sizes (Q1, Q2,...Qn) approaches infinity (), then the long-term average cost curve becomes flatter, as shown in Figure 6.

Fig. 6 Long-term average cost curve for an unlimited number of possible enterprise sizes

In this case, all points on the LATC curve are lowest average cost for a given volume of production, provided that the firm has enough time to change all the necessary resources.

state term period. When planning a long-term expansion or reduction in production volumes, a company cannot limit itself to only increasing or reducing variable costs (the number of workers hired, raw materials used, semi-finished products, etc.). In this case, production efficiency will decrease, since while maintaining unchanged production capacity (fixed costs), the optimal combination of production factors will be disrupted. To increase the profit received, the company strives to reduce average costs, therefore, in the long run, it changes its size as production volumes change. Since this changes the value of fixed costs, the company, as it were, “transitions” to a new average cost curve (AS).

Like a new curve AC, corresponding to larger firm size
we are located relative to the old curve AC? It depends on the day
actions economies of scale. In Fig. 6.8 shows several options
tov of the firm's short-term average cost curves, corresponding
for different production volumes and different effects
scale. With increasing returns to scale of production,
a portional increase in all costs leads to a decrease in average
costs (transition from the curve AC 1 To AC 2). With diminishing returns from
scale when production volumes
too large, proportional to the size
eliminating all costs leads to increased

reduction of average costs (transition from the curve AC 3 k LS 4). 1 1/-shaped line L.A.C. enveloping all possible short-term average cost curves, represents the long-term average cost curve: its descending part

Perfect competition market mechanism

The sink corresponds to increasing returns to scale, and the upstream region corresponds to diminishing returns to scale. Whenever its size changes, the firm “moves” to a new short-term curve each time AC and at the same time moves along the long-term curve LAC.

Thus, by changing the amount of all resources involved in production, the firm seeks to optimize its size and minimize long-term average costs.

Let us now consider how the firm's equilibrium changes when the number of firms in the industry changes. Let's look again at Figure 6.6. If the market price is higher than average costs (Fig. 6.66) and the firm receives a quasi-rent, then in this case new firms, attracted by the opportunity to receive excess profits, will strive to enter this industry. In conditions of perfect competition, there are no significant barriers preventing new firms from entering the industry. Therefore, the supply of products will begin to increase, and as a result, competition between firms leads to a decrease in price and the disappearance of quasi-rent.

When the market situation is unfavorable for a company and the price of its products is below average costs (Fig. b.bv), then the company that finds itself in this situation leaves the market, and the supply of products is reduced. All other things being equal, the price begins to increase until the firm makes a normal profit.

Finally, if the price is equal to the minimum average cost (Fig. 6.6a), then in this case there is no tendency to change the number of firms operating in the industry; this competitive industry is in a state of complete long-term equilibrium, the condition of which can be written as follows:

MS = P = AC = LAC

Graphically, the equilibrium condition of a competitive firm in the long run is shown in Fig. 6.9.

We can conclude that under conditions of perfect competition in the long run, economic efficiency is achieved both in terms of the use of limited resources in a given production process and in terms of their distribution between various production processes.

On the one hand, the condition R - AC shows that the company reaches equilibrium when price and minimum average costs are equal, that is, the most efficient technologies are used in production with the least consumption of resources. In addition, the condition AC = LAC states that a firm is optimally sized when short-run average cost equals minimum long-run average cost.

Chapter 6

Rice. 6.9. Equilibrium of a competitive firm

In the long run

On the other hand, the condition R= MS shows that price as a measure of the marginal utility of a given product is equal to marginal cost as a measure of the opportunity cost of an additional unit of product. Thus, this condition shows that scarce resources are allocated according to consumer preferences.

Producer surplus

In the short run, some production costs remain unchanged, while others change, changing output. Together they constitute the firm's total costs. So, total costs (TC) are the sum of the costs of all resources used to produce a product.

For a short period, total costs can be divided into fixed costs (TFC) and variable costs (TVC):

In cases where it is necessary to emphasize which period we are talking about, then two letters SR are attached to the abbreviated designations of short-term expenses. Then we have the following expression:

Short-run total fixed costs are that portion of total costs that do not change with changes in the level of production. These costs do not depend on the level of output. When production levels for a given plant size change, they remain constant.

Let's assume that a certain company rents an enterprise for 20,000 UAH. per year for 10 years. This amount is part of the firm's total fixed costs. The latter must pay 20,000 UAH. rent annually for 10 years, regardless of the number of products produced. Other examples of a firm's general fixed costs are the salary of its president and the firm's property taxes, if applicable in that country. General fixed costs are sometimes called overhead.

Short-run total variable costs are not constant or fixed: they change with the level of output produced. Payment of labor, raw materials, advertising are variable costs. The larger the production volume, the more units of variable resources are involved, and, therefore, the greater the total variable costs. The data given in table. 1, characterizes a company with fixed costs of 50 UAH. Total costs are the sum of total fixed costs and total variable costs. Based on these data, it is possible to determine other costs: average and marginal, which are separate subtypes of short-term economic costs.

Short-term average costs. Average costs (AC) are the costs per unit of output. There are three types of average costs: average fixed, average variable and average total costs. Average fixed costs (AFC) are the total fixed costs divided by the volume of output (TFC: Q). For example, in table. 2 average fixed costs for 5 units of output are equal to 10 UAH. (TFC = 50 UAH) (50: 5). AFC decreases as production volume increases, as follows from the formula for calculating them.

Average variable cost (AVC) is the total variable cost divided by the volume of output (TVC: Q). For example, in table. 2 average variable costs for production of 6 units of output are equal to 25 UAH. (150:6).

Table 2. Dynamics of the company’s short-term costs (conditional data, in UAH)

Average total cost (ATC) is total cost divided by output (AT: Q). For example, in table. 2 The average total cost of production of 5 units is 36 UAH. (180:6). Managers often refer to the average total cost as the cost per unit of output.

Note that in the short-term average cost abbreviations, two letters SR can be added if necessary. Then:

Short-run marginal cost. Marginal cost (MC) is the increase in costs resulting from producing an additional unit of output. We remember that growth can be both positive and negative. They reflect changes in the level of the vehicle when the level of production changes.

Since with an increase in production in the short term, only the variable part of total costs changes, then:

Short-run production cost curves. Short-run costs at different firms follow the same pattern, which can be explained using the well-known law of diminishing returns. This law is also called the law of descending marginal product. For simplicity of analysis, we assume that the company we are considering uses only two factors: labor (L) - variable, capital (K) - constant. TFCs are graphically displayed as a straight horizontal line. This is explained by the fact that, regardless of changes in production volume Q, the value of total fixed costs is constant TFC1 (Fig. 1).

It is known that an increase in production volume affects an increase in TVC. However, between these values ​​of straight lines

proportional dependence. The TVC curve has two growth branches (Fig. 2).

In the early stages of production, output levels are low; TVC grows at a downward pace as a result of rising variable factor productivity until a certain level of production is reached.

Fig.1. Total Fixed Cost Curve

production Q *. Expansion beyond this level of production causes TVC to grow at an increasing rate as a result of a decrease in the productivity of the variable factor of production. After production level Q, the law of diminishing returns begins to apply. The TVC curve has an intersection point A (Fig. 2).

The reason for the disproportionate growth of TVC is the disproportionate change in the productivity of additional units of the variable factor of production at different stages of production. First, it grows in the interval of production volume from 0 to Q *, and then decreases1.

On the production volume interval from 0 to Q2, the average productivity of the variable input factor increases. If the level of production is greater than Q2, the average productivity of the variable input factor begins to fall as the volume of output increases.

The total cost curve TC can be constructed by adding the total variable cost curve TVC to the total fixed cost curve TFC. The TC and TVC curves are parallel to each other. The vertical distance between them for any level of production is equal to the value of total fixed costs (Fig. 3).

Rice. 2. Total variable cost curve

Rice. 3. Total cost curves

Now our task is to construct curves for average total, variable and fixed costs and find out their characteristic features, as well as the relationships between them.

Let's start by considering the ATC curve, which is shown in Fig. 4.

As we can see, the average total cost curve is arcuate. It comes in the early stages of production. This is explained by the fact that the average product of the variable factor L increases when output increases from 0 to Q3. Later, ATC begins to grow due to a fall in the average product of a variable factor of production with an increase in production (Fig. 4).

Short-term average variable costs (AVC). The AVC curve is similar to the ATC curve. The reason for the arcuate appearance of the AVC curve is the same as in the previous case with the ATC curve. The AVC curve is shown in Fig. 4 under the ATC curve because AVC

Rice. 4. Curves of average total and average variable costs

As Q rises, the ATC and AVC curves move closer to each other, because then ATC takes up a smaller and smaller percentage of the ATC. The minimum point AVC is to the left of the minimum point ATC, leading to minimum AVC at lower levels of production.

Short-run average fixed costs (AFC). As we already know, average fixed costs are calculated using the formula:

They fall as we move along the Q axis (Fig. 5), but never cross it, because they always make up some percentage of the ATS, no matter how small. Therefore AFCs are never zero:

AFC falls because TFC is constant and output Q is variable. So, the higher the level of production, the lower the AFC value that corresponds to it will be. The AFC curve passes first above and then below the AVC curve.

Short-run marginal cost (MC). On a cassock. Figure 6 shows the marginal cost curve. It has two branches, which are delimited by point A - a descending and an increasing branch. This is explained by the fact that for our hypothetical firm the law of diminishing returns or, in other words, the law of descending marginal product does not begin to operate immediately, but according to the volume of production Q *. In the interval from 0 to Q *, the marginal product MPL increases (we assume that the variable factor is labor L) and approaches the maximum, while the marginal costs MC fall, then as MC increases, MPL begins to decrease.

The location of the MS curve relative to the ATC and AVC curves is extremely important (Fig. 6). Please note that the MC curve intersects both of these curves from below at their points

Rice. 5. Average fixed cost curve

Rice. 6. Location of the marginal cost curve

minimum value. This knowledge will be useful to us when studying market structures.

Long-term expenses. In the long run, you can expand or reduce production within an individual firm by changing the costs of all resources. At any given time, the size of the company has a certain value. Within these limits, costs change according to the pattern described for the short-term period. The long-term production cost curve shows its minimum value for a certain volume of production of a firm when all its factors of production are variable. In the long run, there are no fixed costs because all factors are variable.

The main difference between short-run and long-run analysis is the elasticity of factors of production. In a long period, as opposed to a short period, it is possible to control the volume of output and expenses by changing not only the intensity of use of variable factors of production, but also the size and number of enterprises themselves.

In the long run, there are three types of costs: long-term total, average and marginal costs.

The long-term total cost (LRTC) is depicted in Fig. 7 using the LRTC curve. As we can see, towards point A on the LRTC curve, total expenses grow at a downward pace, and later at an increasing rate.

The long-term average cost curve LRAC is shown in Fig. 8 can be constructed on the basis of SRATC curves corresponding to different enterprise sizes of one company. Let's imagine that a company has a small shoe manufacturing enterprise. For its dimensions, a short-term SRATC1 curve can be constructed. It shows the volume of shoe production, provides the minimum ATC1, as well as the value of Q, upon reaching which the company must increase the size of its enterprise. An increase in the capacity of an enterprise indicates a change in the time dimension in which this company operates: it has gone beyond the short-term and entered the long-term period. In addition, using new additional capacity that is permanent, the company will be able to

Fig.7. Long-run total cost curve

decrease the volume of shoe production by changing the costs of variable resources.

So, it will work again for some time in the short run, for which in Fig. Figure 8 shows the ATC2 curve

Rice. 8. Construction of the LRAC curve

As we can see, on the ATC2 curve there are two points a and b, which correspond to the critical volumes of shoe production, 25 and 40 units, respectively. These production volumes guide the shoe company towards the following rational actions: if it wants to produce more than 40 units, it must again increase the capacity of its enterprise, that is, again move from short-term to long-term measurement; if she wants to produce less than 25 units, she must reduce the size of the enterprise, that is, return to the size it had at first (the SRATC1 curve corresponds to these sizes). In Fig. Figure 8 shows five SRATC curves corresponding to five possible sizes of a hypothetical shoe factory. In fact, there may be much more. Using parts (branches) of the SRATC curves, those that are marked off by critical production volumes (25,40,90,105), we can construct the LRAC curve for this enterprise.

Long-run marginal costs LRMC are shown in Fig. 9. They first come as a result of positive economies of scale, and then grow.

The characteristics and connections between these curves are the same as between the corresponding short-term cost curves. At the same time from

Rice. 9. Long-run average and marginal cost curves

mine reasons for the arcuate appearance of the LRAC and SRATC curves. Economists explain this type of LRAC curve by the effect of economies of scale over a long period. It manifests itself in positive and negative economies of scale. When the LRAC curve arrives, positive economies of scale prevail, and vice versa, when it rises, negative economies of scale dominate. The positive effect arises as a result of deepening the division of labor, specialization of production, improving the financial capabilities of the enterprise while increasing its size, and the like. The negative effect is caused by a decrease in the efficiency of company management when it increases its size. Recall that the reason for the arced shape of the SRATC curve is the effect of the law of diminishing returns.

The long-term period differs from the short-term period by the enterprise's ability to change all factors of production. While the firm's building and equipment cannot be replaced in the short run, in the long run the firm can build or rent additional production facilities and install exactly the machines it needs. In the long run, all factors are variable.

Long-run average costs

Let us imagine that a small manufacturing enterprise first deployed minimal production capacity, and then, thanks to successful economic activity, expanded more and more. Initially, for some time, the expansion of production capacity will be accompanied by a decrease in average total costs. However, the introduction of more and more capacity will lead to an increase in average total costs.

In Figure 4.12. this pattern is illustrated for five different enterprise sizes. Curve ATC 1 shows the dynamics of average total costs for the smallest of five enterprises, curve ATC 5 for the largest.

Figure 4.12. Long-run average costs

The construction of increasingly larger enterprises will lead to a reduction in the minimum cost of producing a unit of output until the size of a third enterprise is reached. However, beyond this limit, expansion of production capacity will mean an increase in the minimum level of average total costs.

Thin lines perpendicular to the horizontal axis are of fundamental importance. They show the production volumes at which the enterprise should change its size in order to ensure the lowest possible unit production costs.

In the figure, the LATC curve is the long-term average total cost curve or, as it is often called, the choice curve (or planning curve) of the enterprise.

The long-run average cost curve (LATC) shows the lowest cost of producing any given level of output, while allowing for the possibility of changing all factors of production optimally in order to minimize costs.

Let us give an example to illustrate the above. Suppose you decide to engage in passenger transportation between the village in which you live and the regional center. Depending on the demand for such services, you can provide them in the cheapest way, either using a car, a minibus, or a bus. In other words, your business may be small, medium or large in size.

Each enterprise size is characterized by its own set of short-term average cost curves. For your enterprise they will look like in Figure 4.13.

Rice. 4.13. Average cost curves for small, medium and large enterprises

Well, if the demand is even greater, then you need to purchase a large bus.

Suppose that at first you were engaged in transportation in a passenger car - and that was enough. But you discovered that fellow villagers began to travel to the city more often and it makes sense for you to double transportation from Q 1 to Q 2. In the short term, you can double the number of flights and your average cost per passenger will be ATC 1.

Over the long term, you decide to enlarge your enterprise: after waiting for the car to wear out, you replace it with a minibus. Your average cost is now ATC 2. Why does ATC 2 lie below ATC 1, with traffic volumes exceeding Q 1? Because by using a minibus, instead of making more trips in a passenger car, you save gasoline, your own labor and repair costs, since the physical wear and tear of the vehicle and the frequency of breakdowns are directly proportional to the mileage. However, if the number of passengers is less than Q2, using a minibus has a higher average cost than using a car, since you will be driving the minibus half empty and the higher cost of your capital will be attributable to less output.

Finally, if you intend to transport in volumes exceeding Q 3, then you should get a large bus, and your average costs will be determined by the ATC 3 curve.

Long-run average costs

With constant resource prices economies of scale determines the dynamics of costs in long term. After all, it is he who shows whether increasing production capacity leads to decreasing or increasing returns.

It is convenient to analyze the efficiency of resource use in a given period using the LATC long-term average cost function. What is this function? Let's assume that the Moscow government is deciding on the expansion of the city-owned AZLK plant. With the available production capacity, cost minimization is achieved with a production volume of 100 thousand cars per year. This state of affairs is reflected by the short-term average cost curve ATC 1, corresponding to a given scale of production (Fig. 6.15). Let the introduction of new models, which are planned to be released jointly with Renault, increase the demand for cars. The local design institute proposed two plant expansion projects, corresponding to two possible production scales. Curves ATC 2 and ATC 3 are the short-run average cost curves for this large scale of production. When deciding on the option to expand production, the plant management, in addition to taking into account the financial possibilities of investment, will take into account two main factors - the size demand and meaning costs, with which the required volume of production can be produced. It is necessary to select a production scale that will ensure that demand is met at minimum cost per unit of production.

Rice. 6.15.Long-run average cost curve for a specific project

Here, the points of intersection of adjacent short-term average cost curves (points A and B in Fig. 6.15) are of fundamental importance. By comparing the production volumes corresponding to these points and the magnitude of demand, the need to increase the scale of production is determined. In our example, if the demand does not exceed 120 thousand cars per year, it is advisable to carry out production at the scale described by the ATC 1 curve, i.e. at existing facilities. In this case, the achievable unit costs are minimal. If demand increases to 280 thousand cars per year, then the most suitable plant would be with a production scale described by the ATC 2 curve. This means that it is advisable to carry out the first investment project. If demand exceeds 280 thousand cars per year, a second investment project will have to be implemented, i.e. expand the scale of production to the size described by the ATC 3 curve.

In the long term, there will be enough time to implement any possible investment project. Therefore, in our example, the long-term average cost curve will consist of successive sections of short-term average cost curves up to the points of their intersection with the next such curve (thick wavy line in Fig. 6.15).

Thus, each point on the LATC long-run cost curve determines the minimum achievable unit cost for a given production volume, taking into account the possibility of changes in production scale.

In the extreme case, when for any amount of demand a plant of the appropriate scale is built, i.e. There are infinitely many short-term average cost curves; the long-term average cost curve changes from a wave-like one to a smooth line that goes around all the short-term average cost curves. Each point on the LATC curve is a point of tangency with a specific ATC curve n (Fig. 6.16).