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Chap_06 - Chapter 6 Perfectly Competitive Supply The Cost...

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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 more-or-less arbitrary placement of straight-line 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 straight-line 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 50-minute 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 real-world firms face the kinds of problems that lie behind the cost-oriented and supply-oriented constructs of the chapter. There is no substitute for working the exercises and putting additional material on the chalkboard for in-class study.
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