home Stoves and fireplaces Long-run equilibrium in a perfectly competitive market. Long run equilibrium of a perfectly competitive firm

Long-run equilibrium in a perfectly competitive market. Long run equilibrium of a perfectly competitive firm

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, there are three general cases of the ratio of average costs (AC) of the firm and the market price (P), which determines the position of the firm in the industry in the short run - the presence of losses, the receipt of normal profits or excess profits.

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

Rice. 6.8. The company is making a loss

In the second case, the firm achieves equality between average costs and price (AC = P) with the volume of production Q e , which characterizes the equilibrium of the firm in the industry. After all, the function of the average costs of a firm can be considered as a function of supply, and demand, as we remember, is a function of price (P). This is where equality between supply and demand is achieved, i.e., equilibrium. The volume of production Q e in this case is equilibrium. In equilibrium, the firm earns only normal profit, including accounting profit, and economic profit is zero. The presence of a normal profit provides the firm with a favorable position in the industry.

The absence of economic profit creates an incentive to seek 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.

Rice. 8.8. Firm earning excess profits

However, it is possible to determine more precisely the moment when it is necessary to stop increasing production, so that profit does not turn into losses, as, for example, with the volume of output at the level of Q 3 . To do this, it is necessary to compare the marginal cost (MC) of the firm with the market price, which for a competitive firm is also marginal revenue (MR). Recall that marginal cost reflects the individual cost of producing each successive unit of a good and changes faster than average cost. Therefore, the firm reaches its maximum profit (at MC = MR) much earlier than the average cost equals the price of the goods.

The condition for marginal cost to be equal to marginal revenue (MC = MR) is production optimization rule.

Compliance with this rule helps the company not only maximize profits, 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), should produce only the optimal volume of products. This means that the entrepreneur will always stop at the level of output at which the cost of producing the last unit of the good (i.e., MC) will coincide with the amount of income from the sale of this last unit (i.e., MR). We emphasize that this situation characterizes the behavior of the firm in the short run.

In the long run, industry supply changes. This happens due to an increase or decrease in the number of market participants. If the equilibrium price prevailing in the industry market is above average costs and firms make excess profits, then this stimulates the emergence of new firms in a profitable industry. The influx of new firms expands the industry offer. An increase in the supply of a good in the market leads to a decrease in the price. Falling prices automatically reduce the excess profits of firms.

Prices move up and down, each time passing through a level at which P=AC. In this situation, firms do not incur losses, but do not receive excess profits. Such a long-term situation is called equilibrium.

In equilibrium, when the demand price coincides with average costs, the firm produces according to the optimization rule at the level of MR = MC, that is, it produces the optimal volume of production.

Thus, equilibrium is characterized by the fact that the values of all parameters of the firm coincide with each other:

Since the MR of a perfect competitor is always equal to the market price P = MR, the equilibrium condition for a competitive firm in the industry is the equality

The position of a perfect competitor upon reaching equilibrium in the industry is shown in the following figure.

Rice. 9.8. Firm in equilibrium

The price function (market demand) P for the firm's products passes through the intersection point of the AC and MC functions. Since, under perfect competition, the firm's marginal revenue function MR coincides with the demand (or price) function, the optimal production volume Qopt corresponds to the equation AC=P=MR=MC, which characterizes the firm's position in equilibrium (at point E). We see that the firm does not receive any economic profit or loss in the conditions of equilibrium that develops with long-term changes in the industry.

In the long-run (LR - long-run) period, the fixed costs of the firm FC increase when its production capacity increases. In the long run, the expansion of the scale of the firm with the use of appropriate technologies provides economies of scale. The essence of this effect is that the long-term average costs of LRAC, having decreased after the introduction of resource-saving technologies, cease to change and remain at a minimum level as output increases. 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 Figure 10.8, where economies of scale are observed when the volume of production changes from Q a to Q b . Over the long run, the firm changes its scale in search of the best output and lowest costs. According to the change in the size of the firm (the volume of production capacity), its short-term costs AC change. The various options for the size of a firm, depicted as short-run AC in Figure 10.8, give an idea of how a firm's output may change in the long run (LR). The sum of their minimum values is the firm's long-run average cost (LRAC).

Rice. 10.8. The average cost of the firm in the long run

In the long run, the best scale for a firm is that at which short-run average cost reaches the minimum level of 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. Thus, the firm reaches a long-run equilibrium. In conditions of equilibrium 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 firm's position in long-run equilibrium is shown in Figure 11.8.

Rice. 11.8. The position of the firm in a long-run equilibrium

In the long run, the equilibrium of a competitive firm is characterized by the fact that the optimal output is achieved if the equality P=MC=AC=LRAC is observed.

Under these conditions, the firm finds the optimal scale of production capacity, i.e., optimizes the long-term output.

Note that economic profits under perfect competition are short-term. In long-run equilibrium, the firm earns only normal profits.

In this position, the average and marginal costs of the firm coincide with the equilibrium price in the industry, which has developed when the industry-wide supply and demand are equalized. Note also that the condition for profit maximization is the equality of marginal revenue and marginal cost and the maximum gap between total income and total cost.

TOPIC: FIRM BEHAVIOR UNDER PERFECT COMPETITION

1. Perfect competition: features, advantages and disadvantages

The competitiveness of a large number of small economic entities, when none of them is able to have a decisive influence on the general conditions for the sale of a homogeneous product in a given market, is called perfect competition. The perfect competition model is characterized by five features or assumptions:

1. Homogeneity of products sold. All units of goods in the view of the buyer are exactly the same. The buyer does not have the ability to recognize who made the product. The totality of all enterprises producing homogeneous products forms an industry.

2. The presence of a large number of economic agents (sellers and buyers). A large number means that even large buyers and producers represent volumes of supply and demand that are negligible on the scale of the market.

3. Free entry and exit from the market, that is, the absence of any barriers.

4. Perfect informability of sellers and buyers about goods and prices, that is, market participants have perfect knowledge of all market parameters, since information is distributed instantly.

5. None of the sellers and buyers is able to influence the market price, since the share of each firm in the industry market is insignificant, therefore the demand curve of an individual firm is horizontal (that is, perfectly elastic). A perfect competitor can sell any number of products at the market price. At the same time, the additional income received from the sale of each additional unit of production corresponds exactly to its market price.

Rice. 1.9. Demand for the products of a competitive firm

Let's highlight the advantages of perfect competition:

1) Perfect competition forces firms to produce products at the lowest average cost and sell it at a price corresponding to this cost. Graphically, this means that the average cost curve only touches the demand curve (see figure 11.8 The position of the firm in long-term equilibrium in topic 8). If the cost of producing a unit of output were higher than the price (AC > P), then any product would be economically unprofitable, and firms would be forced to leave this industry. If average costs were below the demand curve, and, accordingly, prices (AC< P), это означало бы, что кривая средних издержек пересекает кривую спроса и образуется некий объем производства, приносящий сверхприбыль. Приток новых фирм свел бы эту прибыль на «нет». Таким образом, кривые только касаются друг друга, что и создает ситуацию длительного равновесия.

2) Perfect competition helps to allocate limited resources in such a way as to achieve maximum satisfaction of needs. This is provided when P=MC. This provision means that firms will produce the maximum possible amount of output until the marginal cost of the resource is equal to the price for which it was bought. This achieves not only high resource allocation efficiency, but also maximum production efficiency.

The disadvantages of perfect competition include:

1) Perfect competition does not provide for the production of public goods, which, although they bring satisfaction to consumers, however, cannot be clearly divided, evaluated and sold to each consumer separately (by the piece). This applies to public goods such as fire safety, national defense, and so on.

2) Perfect competition, involving a huge number of firms, is not always able to provide the concentration of resources necessary to accelerate scientific and technological progress. This primarily concerns fundamental research (which, as a rule, is unprofitable), science-intensive and capital-intensive industries.

3) Perfect competition contributes to the unification and standardization of products. It does not take full account of the wide range of consumer choices. Meanwhile, in a modern society that has reached a high level of consumption, various tastes are developing. Consumers are increasingly considering not only the utilitarian purpose of a thing, but also pay attention to its design, design, and the ability to adapt it to the individual characteristics of each person. All this is possible only under conditions of differentiation of products and services, which is associated, however, with an increase in production costs.

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, there are three general cases of the ratio of the average costs (AC) of the firm and the market price (P), which determines the position of the firm in the industry in the short run - the presence of losses, the receipt of normal profits or excess profits.

In the second case, the firm achieves equality between average costs and price (AC = P) with the volume of production Qe, 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, as we remember, is a function of price (P). So equality is achieved between supply and demand, i.e., equilibrium. The volume of production Qe in this case is equilibrium. In equilibrium, the firm earns only normal profit, including accounting profit, and economic profit is zero. The presence of normal 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.

In the third case, the position of the firm receiving excess profits in the industry is shown. When producing in volume from Q1 to Q2, the firm has an excess profit: the income received from the sale of products at a price P exceeds the costs of the firm (AC< Р). Следует обратить внимание на то, что наибольшая прибыль достигается при производстве продукции в объеме Q2. Размер максимальной прибыли отмечен на рисунке заштрихованным участком.

However, it is possible to determine more precisely the moment when the increase in production should be stopped so that the profit does not turn into losses, as, for example, with the output at the level of Q3. To do this, it is necessary to compare the marginal cost (MC) of the firm with the market price, which for a competitive firm is also marginal revenue (MR). Recall that marginal cost reflects the individual cost of producing each successive unit of a good and changes faster than average cost. Therefore, the firm reaches its maximum profit (with MC = MR) much earlier than the average cost equals the price of the goods.

The condition of equality of marginal costs to marginal income (MC = MR) is the rule of production optimization.

Compliance with this rule helps the company not only maximize profits, but also minimize losses.

A rationally operating firm, regardless of its position in the industry (whether it suffers losses, receives normal profits or excess profits), should produce only the optimal amount of output. This means that the entrepreneur will always stop at the level of output at which the cost of producing the last unit of the good (i.e., MC) coincides with the amount of income from the sale of this last unit (i.e., MR). We emphasize that this situation characterizes the behavior of the firm in the short run.

Prices move up and down, each time passing through a level at which

In this situation, firms do not incur losses, but do not receive excess profits. Such a long-term situation is called equilibrium.

Thus, equilibrium is characterized by the fact that the values of all parameters of the firm coincide with each other:

Since the MR of a perfect competitor is always equal to the market price P = MR, the equilibrium condition for a competitive firm in the industry is the equality

The position of a perfect competitor upon reaching equilibrium in the industry is shown in the following figure.

which characterizes the position of the firm in equilibrium (at point E). We see that the firm does not receive any economic profit or loss in the conditions of equilibrium that develops with long-term changes in the industry.

The behavior of average costs in the long run is shown in Figure 10.8, where economies of scale are observed when the volume of production changes from Qa to Qb. Over the long run, the firm changes its scale in search of the best output and lowest costs. According to the change in the size of the firm (the volume of production capacity), its short-term costs AC change. The various options for the size of the firm, depicted in Figure 5 as short-term AC, give an idea of how the firm's output may change in the long run (LR). The sum of their minimum values is the firm's long-run average cost (LRAC).

In the long run, the best scale for a firm is that at which short-run average cost reaches the minimum level of 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. Thus, the firm reaches a long-run equilibrium. In conditions of equilibrium 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 Figure 6.

In the long run, the equilibrium of a competitive firm is characterized by the fact that the optimal output is achieved when the equality

Under these conditions, the firm finds the optimal scale of production capacity, i.e., optimizes the long-term output.

Note that economic profits under perfect competition are short-term. In long-run equilibrium, the firm earns only normal profits.

In the long run, for an individual firm, the distinction between fixed and variable costs disappears. In order to increase profits, the firm seeks to reduce average costs, so in the long run it changes its size with changes in production volumes. In a graphical interpretation, this will look like a transition from one short-term average cost curve (for example, ATC 1) to another (ATC 2), Fig.3. ten.

With positive economies of scale, the long run average cost (LAC) curve has a negative slope. In the case of an increase in the costs of increasing the scale of production, the LAC curve has a positive slope, which indicates diminishing returns to scale. Thus, when planning a long-term expansion or reduction in production, the firm seeks to find the optimal size and minimize long-term average costs.

Let us now consider how the equilibrium of a firm changes in the long run with a change in the number of firms in a competitive industry. If, in the short run, the price exceeds the firm's average total cost, then the opportunity for economic profit will attract new firms into the industry. But this expansion of the industry will increase the supply of output until the price falls and equals the average total cost. Conversely, if the price of the good is initially less than the average total cost, the inevitable loss will cause firms to leave the industry. The total supply of products on the market will decrease, again raising the price to parity with the average total cost. Therefore, in the long run, the competitive price will tend to equal the minimum of the firm's average total cost.

Under perfect competition, equilibrium is reached when economic profit is zero. In this situation, there are no incentives to expand or contract output, and there are no incentives for new firms to enter the industry, and for old firms to leave it.

As a result, the firm's long-term equilibrium is achieved under the condition: LRMC=LRAC=P (Figure 3.11).

This triple equality means that:

1) Firms operate efficiently with optimal capacity utilization (LRMC = LRAC). 2) The volume of output is optimal (LRMC = P). 3) Public resources are distributed optimally, because marginal cost is equal to the demand for the product (LRMC = P = D). 4) Economic profit is zero, there are no incentives for capital outflow (LRAC = P).

17. Perfect competition: its main features and effectiveness. Product demand and marginal revenue of a perfect competitor.

In conditions perfect competition there is no competition, since there are many firms in the industry and none of them is able to change the market situation.

Perfect competition is a market structure characterized by the following main features:

Market atomization - a large number of sellers and buyers of goods that do not have sufficient size and power to influence production;

Homogeneity of products (standardized goods);

No barriers to entry and exit from the industry;

Full market transparency - buyers and sellers have equal access to information.

The demand curve faced by an individual competitive firm is perfectly elastic (Fig. 3.1, 3.2).

Cr. demand for an individual competitive firm Market demand curve

One of the constraints affecting the choice of a firm in the process of profit maximization is the demand for the products produced by this firm. Under perfect competition, since all firms in the industry are small and produce homogeneous products, each of them must be guided by the market price (be a “price taker”). This means that the price at which each firm sells its output is determined by forces beyond the control of the firm.

Because the firm can sell additional units of output at a constant price, its perfectly competitive marginal revenue (MR) curve is the same as its perfectly elastic demand curve. Thus, under conditions of perfect competition, the marginal revenue and the price of the output of an individual firm are equal to each other, i.e. P = MR.

The perfect competition market model is an idealized, normative model. It is the initial standard for comparing and evaluating the effectiveness of real economic processes in the markets of imperfect competition.

In the long run, firms, by changing the value of all resources involved in production, seek to optimize their size and minimize long-term average costs. In addition, firms already in the industry have plenty of time to either expand or scale back production capacity. New firms can enter the industry, and old firms can leave it, since entry and exit is free.

The purpose of further analysis is to describe the adaptations of a competitive firm to changing conditions and to determine the conditions for the firm's long-term equilibrium.

With positive economies of scale, the long-run average cost curve (LAC) has a negative slope. In the case of an increase in the cost of increasing the scale of production, the curve LAC has a positive slope, indicating diminishing returns to scale. Thus, when planning a long-term expansion or reduction in production, the firm seeks to find the optimal size and minimize long-term average costs.

As a result, the long-run equilibrium of the firm is achieved under the condition that: LRMC=LRAC=P(Fig. 3.11).

This triple equality means that:

1. Firms Operate Efficiently with Optimum Use of Capacity (LRMC=LRAC).

2. The output volume is optimal (LRMC=P).

3. Public resources are optimally distributed, because marginal cost is equal to the demand for the product (LRMC=P=D).

4. Economic profit is zero; there are no incentives for the transfer of capital (LRAC=P).

There is a "paradox of profit" - each firm seeks to maximize economic profit, and industry equilibrium occurs when the desired profit is zero.

Long-term industry supply depends on changes in resource prices. If the prices of traditional resources are unchanged, the industry can expand without a significant impact on prices and costs. The expansion and contraction of the industry affects only the volume of production and does not affect the price (Fig. 3.12, a).

If resource prices rise, it means that the industry is using limited specific resources. In this case, expanding the supply of the industry and attracting new firms increases the demand for these resources, and hence their price. Therefore, the long-term costs of firms and prices for finished products will also grow (Fig. 3.12, b).

If resource prices are falling, the long-term supply curve will have a negative slope (Fig. 3.12, c). This is possible when not only the number but also the size of firms in the industry grows. A larger enterprise can purchase more resources at a lower cost. In this case, the long-run average cost decreases, which leads to a decrease in the price.

Thus, the long-run supply of a perfectly competitive industry depends on changes in resource prices and can take the form of a perfectly elastic, ascending and descending curve.

Entry into and exit from a perfectly competitive market is open to all firms without exception. Therefore, in the long run, the level of profitability becomes the regulator of the resources used in the industry.

If the level of market prices established in the industry is above the minimum of average costs, then the possibility of obtaining economic profits will serve as a kind of incentive for new firms to enter the industry. The absence of barriers on their way will lead to the fact that an increasing share of resources will be directed to the production of this type of goods.

And, conversely, economic losses will act as a disincentive, scaring off entrepreneurs and reducing the amount of resources used in the industry. After all, if a firm intends to leave the industry, then in conditions of perfect competition it will not encounter any barriers in its path. That is, the company in this case will not incur any sunk costs and will find a new use for its assets or sell them without harm to itself. Therefore, it can really fulfill its desire to move resources to another industry.

Zero economic profit

The relationship between the level of profitability in a competitive industry and the size of the use of resources in it, and hence the volume of supply, predetermines break-even of firms operating in a competitive industry in the long run(or equivalently, their receipt zero economic profit). The mechanism of establishment of zero economic profit is shown in fig. 7.12.

Let in a competitive industry (Fig. 7.12 b) initially there is an equilibrium (point O), dictating a certain price level P0, at which the firm (Fig. 7.12 a) receives zero profit in the short run. Suppose further that the demand for the products of the industry suddenly increased. The industry demand curve in this situation will move to the position, and a new short-term equilibrium will be established in the industry (equilibrium point, equilibrium supply, equilibrium price). For the firm, the new higher price level will be a source of economic profit (the price lies above the level of the average total costs of ATC).

Economic profits will attract new producers to the industry. The consequence of this will be the formation of a new supply curve, shifted compared to the original in the direction of large volumes of production. A new, slightly lower price level will also be established. If economic profits are maintained at this price level (as in our diagram), then the influx of new firms will continue, and the supply curve will shift further to the right. In parallel with the influx of new firms into the industry, the supply in the industry will also increase under the influence of the expansion of production capacities by firms already operating in the industry. Gradually, all of them will reach the level of the minimum average long-term costs (LATC), i.e. reached the optimal size of the enterprise (see "Costs").

Rice. 7.12.

It is obvious that both of these processes will last until the supply curve takes the position , which means zero profits for firms. And only then will the influx of new firms dry up - there will no longer be an incentive for it.

The same chain of consequences (but in the opposite direction) unfolds in the event of economic losses:

reduction in demand.
price drop (short-term).
emergence of economic losses at firms (short-term period).
outflow of firms and resources from the industry.
reduction in long-term market supply.
price increase.
break-even recovery (long-term).
stopping the outflow of firms and resources from the industry.

Thus, perfect competition has a peculiar mechanism of self-regulation. Its essence lies in the fact that the industry responds flexibly to changes in demand. It attracts an amount of resources that increases or decreases the supply just enough to compensate for the change in demand. And on this basis, it ensures the long-term break-even of firms.

Long run equilibrium conditions

Summing up, we can say that the equilibrium established in the industry in the long run satisfies three conditions:

All three of these long-run equilibrium conditions can be summarized as follows:

Long run industry supply curve

If we connect all the points of possible long-term equilibrium, then a long-term supply line of a competitive industry () is formed.

Indeed, the equilibrium points O and in fig. 7.12 actually outline the position of the long-term supply curve. They show that, in the long run, a competitive industry can provide any amount of supply at the same price. Indeed, repeating the above chain of reasoning, it is easy to come to the following conclusion: no matter how demand changes, the supply will react in such a way that, in the end, the equilibrium point will again return to the level corresponding to the level of zero economic profit for firms operating in the industry.

So the general principle is that The long-run supply curve of a competitive industry is the line through the break-even points for each level of production. On fig. 7.13 shows different variants of the manifestation of this pattern.

Rice. 7.13.

Industries with fixed costs

In the specific example we have considered (see Fig. 7.12), such a line is a straight line parallel to the x-axis and corresponding to the absolute elasticity of the proposal. The latter, however, does not always take place, but only in the so-called industries with fixed costs. That is, in those cases when, with the expansion of its supply, the industry has the opportunity to purchase the necessary resources at constant prices.

As a rule, this condition is met for industries that are relatively small relative to the scale of the entire economy. For example, the growth in the number of gas stations in Russia does not create tension in any of the resource markets that firms enter when building gas stations. Apart from inflation, the creation of reservoirs, the purchase of pumps, the hiring of personnel, etc. the construction of each additional station costs approximately the same amount (the differences can only be related to its size and design). Consequently, the break-even level at which the price of gas station services will freeze under the influence of competition will always be the same. We have depicted this situation in Fig. 7.13 a, combining on the same graph the long-term supply curve of the industry () and the cost curves of a typical firm (), corresponding to a given level of industry-wide production.

For a perfectly competitive market, this situation is quite typical. Recall stalls and shops of various profiles, workshops for the repair and manufacture of various goods, mini-bakeries, confectioneries, etc. All these types of businesses are small across the country, and their expansion is unlikely to affect the prices of purchased resources.

Industries with rising costs

This is not the case if resources become more and more expensive for each new firm entering the market. This usually happens if the growing demand of an industry for a certain resource is so significant that it creates a shortage in the economy as a whole.

This situation is typical for any industries with rising costs where the prices of factors used in production rise as the industry expands and the demand for those factors increases.

With an increase in long-term costs, newcomers to the industry will reach the level of zero economic profit at a higher price than old-timers. If we turn again to Fig. 7.12, then we can say that the influx of new firms into the industry will not bring supply to the level of the curve , but will stop earlier, say, in a position at which firms will find themselves in a new (taking into account the rise in price of resources) break-even position. It is clear that the long-term supply curve () will pass in this case not along a horizontal path, but along an ascending curve.

In such situations, with the expansion of production, the increase in costs can affect even small industries. After all, unique resources are always available in very limited sizes. So, in the history of Russia in the XIX century. similar processes affected, say, the famous malachite crafts (workshops for artistic stone processing), when the fashion for malachite and the growth in output caused by it collided with the depletion of the reserves of this mineral in the Urals. Once a cheap ("cheerful") stone quickly became expensive, even the kings did not neglect crafts from it, which is perfectly described by P. Bazhov.

Industries with falling costs

Finally, there are industries in which the prices of factors of production decrease as production expands. The minimum average cost in this case also decreases in the long run. And the growth of industry demand in the long run causes a simultaneous increase in supply and a decrease in the equilibrium price.

The long-term supply curve of an industry with falling costs has a negative slope (Fig. 7.13 c).

Such a super-favorable development of events is usually associated with economies of scale in the production of suppliers of resources (raw materials, equipment, etc.) for this industry. For example, it is likely that as farming in Russia grows and becomes stronger, their costs will experience a long-term reduction. The fact is that machines and equipment adapted for farmers are now produced literally by the piece, and therefore very expensive. With the appearance of mass demand for them, production will be put on stream and the cost will drop sharply. Farmers, having felt the cost reduction (in Fig. 7.13 from to ), will themselves begin to reduce the price of their products (curve falling).