Chapter 6
Perfectly Competitive Supply:
The Cost Side of the Market
Purpose:
To show how the cost structure of a firm helps determine the quantity of a
good that a producer will place on the market.
This leads to the supply curve.
The
supply curve and the cost structure of the firm are used to determine the profit
maximizing output for a firm.
Discussions are cast in terms of the cost curves that
underlie supply – the quantity that will be placed on the market at each of a series of
prices.
The family of curves coupled with the nature of a competitive form is used to
show the profit maximizing quantity that should be supplied by the firm.
Length
:
24 pages
Caution – Caution – Caution
This is the most difficult chapter encountered so far.
The major style of
exposition shifts from narrative to graphics.
The arguments presented in
the graphs depend on
the positioning of several cost curves.
Students will
have difficulty making the transition from the moreorless arbitrary
placement of straightline demand curves to the much more precise
placement of the curves that lie behind the supply curve.
Students at this
level cannot be expected to fit smooth functions but “smoothing the
curves” becomes more than just an exercise.
Start by asking the students
to consider the discreet curves in Figures 6.1, 6.2, and 6.3.
These curves
are made up of straightline segments, but they take on the appearance of
smooth curves.
It is a small step to move from the indivisible segments to
purely divisible data that result in smooth curves.
Go from here to the
“real data” curves shown in Figure 6.5 and make a comparison with the
hypothetical smooth curves in Figure 6.6.
Point out that the labels on the
curves match and that the arguments in the chapter will proceed on the
basis of smooth curves
that resemble curves developed from real world
data.
This is an important lesson.
Not all students in the class will need to hear
it, but those who do need it will be completely lost without this information
or reminder.
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Time required to read:
A minimum of two hours.
Students who are uncomfortable
with graphs and cost curves will require more time.
Lectures required for understanding:
Two 50minute lectures should be sufficient.
The first should concentrate on the curves, their shapes, and their geometric relationships.
The second lecture can provide detail on profit maximization and the transfer to a supply
curve.
A thorough summary of the lectures is a good idea.
The material relating to profit
maximization is frequently difficult to understand and it does not lend itself to easy
treatment.
Making connections with the real world is difficult even though all realworld
firms face the kinds of problems that lie behind the costoriented and supplyoriented
constructs of the chapter.
There is no substitute for working the exercises and putting
additional material on the chalkboard for inclass study.
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 Summer '08
 MCLEOD,MARKPEHLIVAN,AYSEOZG
 Economics, Supply And Demand, producer

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