14. Firm-Ind Supply

14. Firm-Ind Supply - Firm and Industry Supply Professor...

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Firm and Industry Supply Professor John Diamond ECON 370: Microeconomic Theory Lecture 14

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2 Firm Supply: Introduction Determinants of firm supply technology costs market environment (assume perfect competition in this lecture) goals behavior of competitors
3 Perfect (“Pure”) Competition Pure Competition : Many firms, all making same product Each firm’s output small relative to total Each firm is a price-taker no influence over the market price for its product Firm is free to vary its own price

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4 Pure Competition: Firm Demand Curve Price taking implies simple firm demand curve If firm sets price above market price, y=0 If firm sets price below market price, y = entire market quantity demanded (Y)
5 Pure Competition: Firm Demand Curve Y \$/output unit Market Supply Market Demand p e

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6 Pure Competition: Firm Demand Curve y \$/output unit Market Supply p e p’ p” At p”, y=Y At price p’, y=0 Market Demand
7 Pure Competition: Firm Demand Curve y \$/output unit Market Supply p e p’ p” Market Demand

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8 Firm is Small, Relative to Industry \$/output unit y Firm’s MC Firm can supply only a small part of total market demand at the equilibrium price Firm’s demand curve p e
9 Firm’s SR Supply Decision: Introduction Assumptions Each firm is in a SR situation Each firm is a profit-maximizer (cost minimizer) How does firm choose its output level? By solving ) y ( c py ) y ( max s s 0 y

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10 Firm’s SR Supply Decision: Solutions (a) y s * > 0: (y) y y s * * 2 2 0 ) ( ) ( 0 ) ( ) ( ) ( s s s s y y at dy y d ii y MC p dy y d i ) y ( c py ) y ( max s s 0 y Solutions to
11 Firm’s SR Supply Decision: Solutions (b) y s * = 0: (y) y y s * = 0 0 y y at 0 ) y ( MC p dy ) y ( d * s s s ) y ( c py ) y ( max s s 0 y Solutions to

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12 Interior Solution: Two Conditions For interior solution y s * > 0, 0 ) y ( MC p dy ) y ( d s s ) y ( MC p * s s or 0 dy ) y ( dMC ) y ( MC p dy d dy ) y ( d s s 2 s 2 increasing , 0 ) ( * MC dy y dMC s s
13 \$/output unit y p e y’ At y = y s *, p = MC and MC slopes upwards MC s (y) y s * Firm’s SR Supply Decision: Graph

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14 Firm’s SR Supply Decision: Max Profits SR supply does not include every point on the upward-sloping part of the MC curve Firm’s profit function is If the firm chooses y = 0 then its profit is ) y ( c F py ) y ( c ) y ( v s s F ) 0 ( c F 0 ) y ( v s If the firm chooses y = 0 then its profit is
15 Firm’s SR Supply Decision: Max Profits So firm will choose y > 0 only if F ) y ( c F py ) y ( v s 0 ) y ( c v ) y ( AVC y ) y ( c p s v

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16 Firm’s SR Supply Decision: Graph AVC s (y) AC s (y) MC s (y) \$/output unit y
17 AVC s (y) AC s (y) MC s (y) p AVC s (y) y s * = 0 \$/output unit y p s (y) y s * > 0 Firm’s SR Supply Decision: Graph

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18 Firm’s SR supply curve Firm’s SR Supply Decision: Graph AVC s (y) AC s (y) MC s (y) \$/output unit y Shutdown point
19 SR Supply Decision: Shut Down v. Exiting Shut-down is not the same as exit Shutting-down Produce no output, but Firm still in industry and Suffers loss = F Exiting Firm leaves the industry LR only

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14. Firm-Ind Supply - Firm and Industry Supply Professor...

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