Handout_Competitive_Market_Supply[1]

Handout_Competitive_Market_Supply[1] - CARLETON COLLEGE...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
COMPETITIVE MARKET SUPPLY AND INPUT DEMANDIN THE SHORT-RUN S COTT B IERMAN (D O NOT QUOTE WITHOUT PERMISSION ) CARLETON COLLEGE
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 COMPETITIVE MARKET SUPPLY AND INPUT DEMAND IN THE SHORT RUN In this handout we derive the short-run market supply function for a set of firms in a competitive output market while simultaneously deriving the short-run market input demand function. The most basic reason for the linkage is that you can either think of profit- maximization in two virtually equivalent ways. Either it can be identified in terms of the output choice that results in the largest profits – and then you figure out what input mix minimizes the cost of this output. Or, it can be identified in terms of what input choice maximize profits – and then you figure out what output is associated with this input choice. Since profit-maximizing output choice and profit-maximizing input choice are linked so directly, there are economies of scope in deriving the supply of output function and the demand for input functions simultaneously. Why derive the supply of output and the demand for input functions simultaneously? Because there are economies of scope in doing so (i.e. for the same reason that General Motors produces cars and trucks). There is also a second reason. In many output markets the price of inputs used by firms in those markets are dependent on the collective demand for inputs by those firms. On the flip side, it is equally obvious that in many input markets the price of the output produced using those inputs is dependent on the collective supply of output produced by
Background image of page 2
3 those firms. If either of these conditions is true, then it is impossible to correctly derive a market supply curve without having a fully developed understanding of the input market. And it is impossible to correctly derive an input demand function without having a fully developed output market. Why derive the supply of output and the demand for input functions simultaneously? Because it is impossible to derive either of these without the other in a large number of realistic situations. THE LINKAGE BETWEEN FIRM OUTPUT SUPPLY AND INPUT DEMAND Consider a firm with a simple single-input production function given by, b x aL q = . For a competitive firm in the output market the parameter, b , will be some number between 0 and 1. 1 This will imply that there is diminishing marginal product which in turn implies increasing marginal cost – a necessary condition for the firm to be competitive. Of course, the parameter, a , need only be a positive number. Solving the production function for L gives, 1 Formally its interpretation is the output elasticity with respect to the input (the percentage change in output generated by some percentage change in the input).
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 b x L a q = L a q b x = 1 b b x q a L 1 1 = All that we have done is to take an expression that provides the maximum amount of output that can be produced from any given amount of input (this is the production function) and
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/05/2011 for the course ACCOUNTING 101 taught by Professor Online during the Spring '11 term at Colorado Technical University.

Page1 / 30

Handout_Competitive_Market_Supply[1] - CARLETON COLLEGE...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online