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Week9 Handout (6pp)(1) - Firm Supply Firm Supply Industry...

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26/09/2011 1 1 Firm Supply & Industry 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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