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Unformatted text preview: Chapter 8 Firms Supply Curves and Market Supply Curves Preparation. The topics discussed in this note are: Do firms really profit maximize? Achieving a profit maximum. Producers Surplus. Total Producers Surplus. Firms supply curve. Shutdown decision. Average variable cost. Shutdown point. Shutdown price. Market supply curve. Shifting (or changes to) market supply curves. Motivation. In the previous chapter we explored in detail the connections between a firms technology, the prices of its inputs and the consequent costs that it would suffer from production. We learned how to combine these data into a simple rule that compares marginal revenue and marginal cost to determine how a profit-maximizing 181 182 CHAPTER 8. FIRMS SUPPLY CURVES firm chooses the quantity of its product to supply to its market in response to a given price for its product. This is an important step on the path to constructing a market supply curve since, once we know how each firm determines its quantity supplied, all we have to do is add up these individual firms quantities supplied to discover the total quantity supplied to a market for a given price for the product. This is, of course, exactly what a market supply curve tells us. So the task that is immediately before us is to establish what is the supply curve for an individual firm. Much of this task is already accomplished since, as remarked above, we have already figured out the marginal revenue and marginal cost comparison rule that determines the quantity that a firm will supply if it is going to produce at all. Still left unanswered at the moment is the question When will a firm produce? Once we have the answer then we will be quickly and easily able to construct firms supply curves and from these be able to build a market supply curve. When a firm produces nothing it is said to be shutdown. This is quite common. For example, there are many oil wells in the US that are capped (and so produce nothing) when the market price for crude oil is low. But when the market price for crude oil rises to high values these caps are removed, the pumps are turned on, and oil is again produced from these wells. Should the market price for crude oil then fall again to low levels, the caps are once more set in place and these wells return to being shutdown. Many firms operate in this manner. Think of a motel near a lake in the northern US. Many such motels close ( i.e. shutdown) for the winter and reopen in the summer when the demand for accommodation rises. Do not confuse a firm that shuts down with a firm that exits. A shutdown firm is still present in the market, but it is not currently producing. A firm that exits leaves the market....
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- Spring '08