1、Chapter Twenty-TwoFirm SupplyFirm SupplyuHow does a firm decide how much product to supply?This depends upon the firmsl technologyl market environmentl goalsl competitors behaviorsMarket EnvironmentsuAre there many other firms,or just a few?uDo other firms decisions affect our firms payoffs?uIs trad
2、ing anonymous,in a market?Or are trades arranged with separate buyers by middlemen?Market EnvironmentsuMonopoly:Just one seller that determines the quantity supplied and the market-clearing price.uOligopoly:A few firms,the decisions of each influencing the payoffs of the others.Market EnvironmentsuD
3、ominant Firm:Many firms,but one much larger than the rest.The large firms decisions affect the payoffs of each small firm.Decisions by any one small firm do not noticeably affect the payoffs of any other firm.Market EnvironmentsuMonopolistic Competition:Many firms each making a slightly different pr
4、oduct.Each firms output level is small relative to the total.uPure Competition:Many firms,all making the same product.Each firms output level is small relative to the total.Market EnvironmentsuLater chapters examine monopoly,oligopoly,and the dominant firm.uThis chapter explores only pure competitio
5、n.Pure CompetitionuA 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.uThe firm is free to vary its own price.Pure CompetitionuIf the firm sets its own price above the market price then the quantity demanded from
6、the firm is zero.uIf the firm sets its own price below the market price then the quantity demanded from the firm is the entire market quantity-demanded.Pure CompetitionuSo what is the demand curve faced by the individual firm?Pure CompetitionY$/output unitMarket SupplyMarket DemandpePure Competition
7、y$/output unitMarket SupplypepAt a price of p,zero is demanded from the firm.Market DemandPure Competitiony$/output unitMarket Supplypepp”At a price of p”the firm faces the entire market demand.At a price of p,zero is demanded from the firm.Market DemandPure CompetitionuSo the demand curve faced by
8、the individual firm is.Pure Competitiony$/output unitMarket Supplypepp”At a price of p”the firm faces the entire market demand.At a price of p,zero is demanded from the firm.Market DemandPure CompetitionY$/output unitpepp”Market DemandSmallnessuWhat does it mean to say that an individual firm is“sma
9、ll relative to the industry”?Smallness$/output unityFirms MCThe individual firms technology causes italways to supply only a small part of the total quantity demanded at the market price.Firms demand curvepeThe Firms Short-Run Supply DecisionuEach firm is a profit-maximizer and in a short-run.uQ:How
10、 does each firm choose its output level?The Firms Short-Run Supply DecisionuEach firm is a profit-maximizer and in a short-run.uQ:How does each firm choose its output level?uA:By solvingmax()().yssypycy 0 The Firms Short-Run Supply Decisionmax()().yssypycy 0 What can the solution ys*look like?The Fi
11、rms Short-Run Supply Decisionmax()().yssypycy 0 What can the solution ys*look like?(a)ys*0:(y)yys*()()()()().*idydypMCyiidydyat yyssss 0022The Firms Short-Run Supply Decisionmax()().yssypycy 0 What can the solution y*look like?(b)ys*=0:(y)yys*=0dydypMCyat yysss ()().*00The Firms Short-Run Supply Dec
12、isionFor the interior case of ys*0,the first-order maximum profit condition isdydypMCyss ()().0That is,pMCyss().*So at a profit maximum with ys*0,themarket price p equals the marginalcost of production at y=ys*.The Firms Short-Run Supply DecisionFor the interior case of ys*0,the second-order maximum
13、 profit condition is dydyddypMCydMCydysss220 ()()().That is,dMCydyss().*0So at a profit maximum with ys*0,thefirms MC curve must be upward-sloping.The Firms Short-Run Supply Decision$/output unitypeys*yMCs(y)The Firms Short-Run Supply Decision$/output unitypeys*yAt y=ys*,p=MC and MCslopes upwards.y=
14、ys*is profit-maximizing.MCs(y)The Firms Short-Run Supply Decision$/output unitypeys*yAt y=ys*,p=MC and MCslopes upwards.y=ys*is profit-maximizing.At y=y,p=MC and MC slopes downwards.y=y is profit-minimizing.MCs(y)The Firms Short-Run Supply Decision$/output unitypeyAt y=ys*,p=MC and MCslopes upwards.
15、y=ys*is profit-maximizing.So a profit-max.supply level can lie only on the upwards sloping part of the firms MC curve.MCs(y)ys*The Firms Short-Run Supply DecisionuBut not every point on the upward-sloping part of the firms MC curve represents a profit-maximum.The Firms Short-Run Supply DecisionuBut
16、not every point on the upward-sloping part of the firms MC curve represents a profit-maximum.uThe firms profit function isuIf the firm chooses y=0 then its profit is ssvypycypyFcy()()().svyFcF()().00The Firms Short-Run Supply DecisionuSo the firm will choose an output level y 0 only if svypyFcyF()()
17、.The Firms Short-Run Supply DecisionuSo the firm will choose an output level y 0 only ifuI.e.,only ifEquivalently,only if svypyFcyF()().pycyv ()0pcyyAVCyvs ()().The Firms Short-Run Supply DecisionAVCs(y)ACs(y)MCs(y)$/output unityThe Firms Short-Run Supply DecisionAVCs(y)ACs(y)MCs(y)$/output unityThe
18、 Firms Short-Run Supply DecisionAVCs(y)ACs(y)MCs(y)$/output unityp AVCs(y)The Firms Short-Run Supply DecisionAVCs(y)ACs(y)MCs(y)p AVCs(y)ys*0.$/output unityThe Firms Short-Run Supply DecisionAVCs(y)ACs(y)MCs(y)p AVCs(y)ys*=0.$/output unityp AVCs(y)ys*0.The Firms Short-Run Supply DecisionAVCs(y)ACs(y
19、)MCs(y)p AVCs(y)ys*=0.The firms short-runsupply curve$/output unityp AVCs(y)ys*0.The Firms Short-Run Supply DecisionAVCs(y)ACs(y)MCs(y)The firms short-runsupply curveShutdown point$/output unityThe Firms Short-Run Supply DecisionuShut-down is not the same as exit.uShutting-down means producing no ou
20、tput(but the firm is still in the industry and suffers its fixed cost).uExiting means leaving the industry,which the firm can do only in the long-run.The Firms Long-Run Supply DecisionuThe long-run is the circumstance in which the firm can choose amongst all of its short-run circumstances.uHow does
21、the firms long-run supply decision compare to its short-run supply decisions?The Firms Long-Run Supply DecisionuA competitive firms long-run profit function isuThe long-run cost c(y)of producing y units of output consists only of variable costs since all inputs are variable in the long-run.()().ypyc
22、 y The Firms Long-Run Supply DecisionuThe firms long-run supply level decision is touThe 1st and 2nd-order maximization conditions are,for y*0,max()().yypyc y 0 pMC y anddMC ydy ()().0The Firms Long-Run Supply DecisionuAdditionally,the firms economic profit level must not be negative since then the
23、firm would exit the industry.So,()()()().ypyc ypc yyAC y 0The Firms Long-Run Supply DecisionMC(y)AC(y)y$/output unitThe Firms Long-Run Supply DecisionMC(y)AC(y)y$/output unitp AC(y)The Firms Long-Run Supply DecisionMC(y)AC(y)y$/output unitp AC(y)The Firms Long-Run Supply DecisionMC(y)AC(y)y$/output
24、unitThe firms long-runsupply curveThe Firms Long-Run Supply DecisionuHow is the firms long-run supply curve related to all of its short-run supply curves?The Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitACs(y)MCs(y)The Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitACs(
25、y)MCs(y)pys*y*ys*is profit-maximizing in this short-run.The Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitACs(y)MCs(y)pys*y*ys*is profit-maximizing in this short-run.sThe Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitACs(y)MCs(y)pys*y*The firm can increase profit by inc
26、reasingx2 and producing y*output units.s The Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitACs(y)MCs(y)p”ys*ys*is loss-minimizing in this short-run.The Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitACs(y)MCs(y)p”ys*ys*is loss-minimizing in this short-run.LossThe Firms L
27、ong&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitACs(y)MCs(y)p”ys*This loss can be eliminated in the long-run by the firm exiting the industry.LossThe Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitThe Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitpys*ys*is profit-m
28、aximizing in this short-run.The Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitpys*ys*is profit-maximizing in this short-run.sThe Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitpys*ys*is profit-maximizing in this short-run.y*is profit-maximizing in the long-run.y*The Firm
29、s Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitpys*ys*is profit-maximizing in this short-run.y*is profit-maximizing in the long-run.y*The Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitpys*y*s The firm can increase profit by reducingx2 and producing y*units of output.The Firm
30、s Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitThe Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitThe Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitThe Firms Long&Short-Run Supply DecisionsMC(y)AC(y)y$/output unitShort-run supply curvesLong-run supply curveProd
31、ucers Surplus RevisiteduThe firms producers surplus is the accumulation,unit by extra unit of output,of extra revenue less extra production cost.uHow is producers surplus related profit?Producers Surplus Revisitedy$/output unitAVCs(y)ACs(y)MCs(y)Producers Surplus Revisitedy$/output unitAVCs(y)ACs(y)
32、MCs(y)Producers Surplus Revisitedy$/output unitAVCs(y)ACs(y)MCs(y)py*(p)Producers Surplus Revisitedy$/output unitAVCs(y)ACs(y)MCs(y)pPSy*(p)Producers Surplus RevisitedSo the firms producers surplus is PS ppMCz d zpypMCz d zpypcypsypsypv()()()*()()()*()*().*()*()00That is,PS=Revenue-Variable Cost.Pro
33、ducers Surplus Revisitedy$/output unitAVCs(y)ACs(y)MCs(y)pPSy*(p)Producers Surplus Revisitedy$/output unitAVCs(y)ACs(y)MCs(y)py*(p)cypMCz d zvsyp(*()()()*()0Producers Surplus Revisitedy$/output unitAVCs(y)ACs(y)MCs(y)py*(p)Revenue=py*(p)Producers Surplus Revisitedy$/output unitAVCs(y)ACs(y)MCs(y)py*
34、(p)Revenue=py*(p)cv(y*(p)Producers Surplus Revisitedy$/output unitAVCs(y)ACs(y)MCs(y)pPSy*(p)Producers Surplus RevisiteduPS=Revenue-Variable Cost.uProfit=Revenue-Total Cost =Revenue-Fixed Cost -Variable Cost.uSo,PS=Profit+Fixed Cost.uOnly if fixed cost is zero(the long-run)are PS and profit the same.
