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4.2 Producer's Equilibrium: The Basis of the Supply 4.3 Change in Quantity Supplied Versus Change 4.4 Determinants of Supply Besides the demand forces, the supply forces constitute the other crucial component of market mechanism. It is the producers who supply goods and services to the market. In the last chapter we studied concepts associated with production and cost, which are relevant for producers. But we did not learn about their choice behaviour i.e. which level of output they should produce so as to maximise their profits. In this chapter we develop the revenue concepts, and, together with the cost concepts, we study profit maximisation. This, in turn, forms the basis of what is called the supply curve . Comparable to the demand curve, the supply curve shows different quantities produced and sold at different prices. In the last chapter, we saw that profits are equal to the difference between total revenues and total costs. We also discussed how total costs change with output. In this chapter, we first analyse how total revenues, defined as price × output, change with output. This sets the stage for analysing profit maximisation or what is called producer’s equilibrium . It is an equilibrium notion in the sense that if the firm selects the level of output at which profit is maximised, it would like to “stay” or “rest” at that level of output; there is R EVENUES , P RODUCER ± S E QUILIBRIUM AND THE S UPPLY C URVE C HAPTER 4
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I NTRODUCTORY M ICROECONOMICS 68 no incentive for it to increase or decrease output from that level. 4.1 TOTAL REVENUES Unlike costs, the effect of a change in output on the total revenue of a firm depends on the market structure , which refers to the number of firms operating in an industry, the nature of competition between them and the nature of the product. In this chapter, we will consider only one kind of market structure, namely, perfect competition, which is of central importance in economic analysis. Other types of market structure will be studied in Chapter 6. 4.1.1 Perfect Competition The following six characteristics define perfect competition or a perfectly competitive market . (A) There are a large number of buyers and sellers (producers). (B) Firms sell a very homogeneous (i.e. identical) product or service. (C) There is free entry and exit. (D) Perfect knowledge. (E) Uniform price. (F) No transport and selling costs. It is hard to find markets, which exactly fit the definition of perfect competition. But the markets for goods and services like wheat, a standard hair cut or a leather football can be thought of as examples of industries, which are very close to perfectly competitive markets. Because, there are typically many producers of these items. Each of these is a standardised item, i.e., naturally homogeneous. Moreover, it is relatively easy to enter or get out of these businesses.
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This note was uploaded on 04/20/2010 for the course CEDT 601 taught by Professor Ypr during the Spring '00 term at Indian Institute of Technology, Kharagpur.

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