Maximizing Profits in a Competitive Market: A Firm's Supply Decision

1. Firm Supply • Demand Curve Facing Competitive Firm • Supply Decision of a Competitive Firm • Producer’s Surplus and Profits • Long-Run

2. The Demand Curve Facing a Competitive Firm

3. Supply Decision of a Competitive Firm • Problem of a competitive firm:

4. Revenues, Costs, and Profits

5. Maximum Profits

6. Optimal Quantity Supplied • Firm maximizes: • Necessary condition for optimal choice:

7. An Example • Short-run cost function: • Marginal cost function:

8. An Example • Average variable costs: • Average costs:

9. An Example • Profit maximization: • Necessary condition:

10. An Example

11. An Example: Profits

12. Producer’s Surplus • Producer’s surplus=Area below price above supply curve • Alternatively: below supply curve where area below supply curve (MC):

13. An Example: Producer’s Surplus

14. An Example: Producer’s Surplus

15. Producer’s Surplus and Profits • Producer’s surplus: • Profits:

16. An Example: Producer’s Surplus and Profits

17. An Example • Output: • Profits:

18. An Example • Profits: • Producer’s surplus:

19. One Exception: or ?

20. A Second Exception: Shutdown! • Profits if firm produces: • Profits if firm does not produce: • Producing is better if:

21. A Second Exception: Shutdown! • Producing is better if: • Rearrange. Produce only if:

22. Shutdown

23. The Firm’s Supply Curve

24. Long and Short Run Supply in Consultant Firm Example

25. Shutdown in the Short-Run and in the Long-Run • In the short-run, the shutdown condition is: • In the long-run, the shutdown condition is: