ECN 203 (5), Product Market Supply - Chapter 5 Product...

Chapter 5 –
Product Market Supply
❚
This chapter examines the major
causes of how much firms will supply
of a specific good (under perfect
competition), given the price of the
good, the price of inputs (e.g. energy,
and other causes that we will cover.
❚
It also explains how we distinguish
between individual and market supply,
and goes further into the individual
producer’s production decision.

Price and Quantity Supplied:
Direction of Change
❚
Recall – the good’s own price (P)
is a cause of quantity supplied of
that good (Q
S
).
P ↑ ⇒ Q
S
↑ .
❚
We’ll examine why in more detail.

Marginal Cost
❚
Marginal Cost (MC) – the change in
total cost that a firm experiences
as a result of increasing the
quantity or output of the good it’s
producing (Q).
❚
Formula: MC = ∆ (Total Cost)/ ∆ Q .

Properties
of Marginal Cost (MC)
❚
MC > 0. Q ↑ ⇒ (Total Cost) ↑
❚
Comes from production function
(relationship how inputs combine
to produce output).

The Law of Diminishing
Returns and Marginal Cost
❚
The Law of Diminishing Returns (LDR)
necessarily implies increasing