Week9 Revised Handout (6pp)

# Week9 Revised Handout (6pp) - 5/9/2011 Firm Supply Firm...

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5/9/2011 1 1 Firm Supply Chapters 22 and 23 Firm Supply Q: How does a firm decide how much product to supply? A: This depends upon the firm’s – technology (production function) – market environment (prices) – competitors’ behaviors ( competition, monopoly, oligopoly) Market Environments Monopoly: Just one seller that determines the quantity supplied and the market-clearing price. Oligopoly: A few firms, the decisions of each influencing the payoffs of the others. Pure Competition: Many firms, all making the same product. Each firm’s output level is small relative to the total. Pure Competition A firm in a perfectly competitive market knows it has no influence over the market price for its product. The firm is a market price-taker . If the firm sets its own price above the market price then the quantity demanded from the firm is zero. If the firm sets its own price below the market price then the quantity demanded from the firm is the entire market quantity-demanded. Firm’s Short-Run Supply Decision Each firm is a profit-maximizer and in a short-run. Q: How does each firm choose its output level? A: By solving ). y ( c py ) y ( max s s y 0 First-order condition For the interior case of y s * > 0, the first-order condition for profit maximisation is . ) y ( MC p dy ) y ( d s s 0 That is, ). y ( MC p * s s So at a profit maximum with y s * > 0, the market price p equals the marginal cost of production at y = y s *.

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5/9/2011 2 Second-order condition For the interior case of y s * > 0, the second-order condition for profit maximisation is . dy ) y ( dMC ) y ( MC p dy d dy ) y ( d s s s 0 2 2 That is, . dy ) y ( dMC * s s 0 So at a profit maximum with y s * > 0, the firm’s MC curve must be upward-sloping. Firm’s Short-Run Supply Decision \$/output unit y p e y s * y’ At y = y s *, p = MC and MC slopes upwards. y = y s * is profit-maximizing. MC s (y) Firm’s Short-Run Supply Decision \$/output unit y p e y s * y’ At y = y s *, p = MC and MC slopes upwards. y = y s * is profit-maximizing. MC s (y) At y = y’, p = MC and MC slopes downwards. y = y’ is profit-minimizing. Firm’s Short-Run Supply Decision \$/output unit y p e y s * y’ At y = y s *, p = MC and MC slopes upwards. y = y s * is profit-maximizing. MC s (y) So a profit-max. supply level can lie only on the upwards sloping part of the firm’s MC curve. Is that all? Not quite Not every point on the upward-sloping part of the firm’s MC curve represents a profit-maximum. Total revenue must be greater than variable cost. o If revenue is \$100 and variable costs are \$120 then the firm is better shutting down as that will save \$20. Shutdown condition
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## This note was uploaded on 06/12/2011 for the course ECONOMICS 3291 taught by Professor Professorsnamespublishedtheyarethesoleowners during the Three '11 term at University of New South Wales.

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Week9 Revised Handout (6pp) - 5/9/2011 Firm Supply Firm...

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