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Firm Supply. Molly W. Dahl Georgetown University Econ 101 – Spring 2008. Market Environments. Perfect Competition Many buyers & sellers A firm in a perfectly competitive market knows it has no influence over the market price for its product. The firm is a market price-taker .

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Firm Supply

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Firm supply l.jpg

Firm Supply

Molly W. Dahl

Georgetown University

Econ 101 – Spring 2008


Market environments l.jpg

Market Environments

  • Perfect Competition

    • Many buyers & sellers

    • A firm in a perfectly competitive market knows it has no influence over the market price for its product. The firm is a marketprice-taker.


The firm s short run supply decision l.jpg

The Firm’s Short-Run Supply Decision

  • Each firm is a profit-maximizer and in a short-run.

  • Q: How does each firm choose its output level?


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The Firm’s Short-Run Supply Decision

  • Each firm is a profit-maximizer and in a short-run.

  • Q: How does each firm choose its output level?

  • A: By solving


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The Firm’s Short-Run Supply Decision

For the interior case of ys* > 0, the first-order maximum profit condition is

That is,

So at a profit maximum with ys* > 0, themarket price p equals the marginalcost of production at y = ys*.


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The Firm’s Short-Run Supply Decision

For the interior case of ys* > 0, the second-order maximum profit condition is

That is,

So at a profit maximum with ys* > 0, thefirm’s MC curve must be upward-sloping.


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The Firm’s Short-Run Supply Decision

At y = ys*, p = MC and MCslopes upwards. y = ys* is profit-maximizing.

$/output unit

pe

MCs(y)

y’

ys*

y

At y = y’, p = MC and MC slopes downwards.y = y’ is profit-minimizing.


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The Firm’s Short-Run Supply Decision

At y = ys*, p = MC and MCslopes upwards. y = ys* is profit-maximizing. So a profit-max. supply level can lie only on

the upwards sloping part of the firm’s MC curve.

$/output unit

pe

MCs(y)

y’

ys*

y


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The Firm’s Short-Run Supply Decision

  • But not every point on the upward-sloping part of the firm’s MC curve represents a profit-maximum.


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The Firm’s Short-Run Supply Decision

  • But not every point on the upward-sloping part of the firm’s MC curve represents a profit-maximum.

  • The firm’s profit function is

  • If the firm chooses y = 0 then its profit is


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The Firm’s Short-Run Supply Decision

  • So the firm will choose an output level y > 0 only if


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The Firm’s Short-Run Supply Decision

  • So the firm will choose an output level y > 0 only if

  • I.e., only ifEquivalently, only if


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The Firm’s Short-Run Supply Decision

$/output unit

MCs(y)

ACs(y)

AVCs(y)

y


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The Firm’s Short-Run Supply Decision

$/output unit

MCs(y)

ACs(y)

AVCs(y)

y


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The Firm’s Short-Run Supply Decision

p > AVCs(y)

$/output unit

MCs(y)

ACs(y)

AVCs(y)

y


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The Firm’s Short-Run Supply Decision

p > AVCs(y) ys* > 0.

$/output unit

MCs(y)

ACs(y)

AVCs(y)

y


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The Firm’s Short-Run Supply Decision

p > AVCs(y) ys* > 0.

$/output unit

MCs(y)

ACs(y)

AVCs(y)

y

p < AVCs(y) ys* = 0.


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The Firm’s Short-Run Supply Decision

p > AVCs(y) ys* > 0.

$/output unit

MCs(y)

ACs(y)

AVCs(y)

The firm’s short-runsupply curve

y

p < AVCs(y) ys* = 0.


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The Firm’s Short-Run Supply Decision

$/output unit

Shutdown point

MCs(y)

ACs(y)

AVCs(y)

The firm’s short-runsupply curve

y


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The Firm’s Short-Run Supply Decision

  • Shut-down is not the same as exit.

  • Shutting-down means producing no output (but the firm is still in the industry and suffers its fixed cost).

  • Exiting means leaving the industry, which the firm can do only in the long-run.


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In Class

  • Producer’s Surplus Revisited

  • The Firm’s Long-Run Supply Decision


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