Chapter22 - Chapter 22 Firm Supply 1 Firms face two sorts...

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Chapter 22 - Firm Supply 1. Firms face two sorts of constraints (a) technological constraints - summarized by production function (b) economic constraints - summarized by cost function (c) market constraint - how will consumers and other firms react to a given firm’s choice (how much to produce and what price to charge)? 2. Pure competition (a) formally - takes market price as given, outside of any particular firms control (b) example: many small price takers (c) demand curve facing a competitive firm (see figure 22.1. in the textbook) 3. Supply decision of competitive firm (a) max y py - c ( y ) (b) first-order condition: p = c ( y ) (c) marginal revenue (in the competitive case, price) equals marginal cost deter- mines supply as function of price (d) second-order condition: - c ′′ ( y ) 0, or c ( y ) 0 (e) only upward-sloping part of marginal cost curve matters (f) is it profitable to operate at all? compare py - c v ( y ) - F with - F profits from operating will be greater when p > c v ( y ) /y operate when price covers average variable costs 4. So supply curve is the upward-sloping part of
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