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Firm Supply
Firm Supply
How
Market Environments
Are
Market Environments
Monopoly:
Market Environments
Dominant
Market Environments
Monopolistic
Competition: Many
firms each making a slightly different
product. Each firms output level is
small relative to the total.
Pure Competition: Many firms, all
making the same product. Each
firms output level is small relative to
the total.
Market Environments
Later
Pure Competition
A
Pure Competition
If
Pure Competition
So
Pure Competition
$/output unit
Market Supply
pe
Market Demand
Pure Competition
$/output unit
Market Supply
p
pe
At a price of p, zero is
demanded from the firm.
Market Demand
Pure Competition
$/output unit
Market Supply
p
pe
p
At a price of p, zero is
demanded from the firm.
Market Demand
y
At a price of p the firm faces the entire
market demand.
Pure Competition
So
Pure Competition
$/output unit
Market Supply
p
pe
p
At a price of p, zero is
demanded from the firm.
Market Demand
y
At a price of p the firm faces the entire
market demand.
Pure Competition
$/output unit
p
pe
p
Market Demand
Smallness
What
Smallness
$/output unit
Firms MC
Firms demand
curve
y
The individual firms technology causes it
always to supply only a small part of the
total quantity demanded at the market price.
max s ( y ) py cs ( y ).
y 0
dy
(y)
d s ( y)
*
( ii )
0 at y y s .
2
dy
ys*
MC
(
y
)
0
s
(y)
dy
*
at y y s 0.
y
ys* = 0
MC
(
y
That is,
s s ).
p MCs ( y )
0.
dy
dy
dy 2
dMCs ( y*s )
0.
That is,
dy
So at a profit maximum with ys* > 0, the
firms MC curve must be upward-sloping.
pe
MCs(y)
y
ys*
At y = ys*, p = MC and MC
slopes upwards. y = ys* is
profit-maximizing.
pe
MCs(y)
y
ys*
At y = ys*, p = MC and MC
slopes upwards. y = ys* is
profit-maximizing.
pe
MCs(y)
y
ys*
y
At y = y, p = MC and MC slopes downwards.
y = y is profit-minimizing.
pe
At y = ys*, p = MC and MC
slopes upwards. y = ys* is
profit-maximizing.
So a profit-max.
supply level
can lie only on
MCs(y)
the upwards
sloping part
ys*
y
of the firms
MC curve.
I.e.,
only if
py c v ( y ) 0
Equivalently, only if
cv ( y)
p
AVCs ( y ).
y
MCs(y)
ACs(y)
AVCs(y)
MCs(y)
ACs(y)
AVCs(y)
p AVCs(y)
MCs(y)
ACs(y)
AVCs(y)
p AVCs(y)
ys* > 0.
MCs(y)
ACs(y)
AVCs(y)
p AVCs(y)
ys* > 0.
MCs(y)
ACs(y)
AVCs(y)
p AVCs(y)
y
ys* = 0.
p AVCs(y)
ys* > 0.
MCs(y)
ACs(y)
AVCs(y)
p AVCs(y)
Shutdown
MC
(y)
s
point
ACs(y)
AVCs(y)
The firms short-run
supply curve
y
The
The
AC(y)
MC(y)
AC(y)
MCs(y)
MC(y)
AC(y)
MC(y)
MCs(y)
AC(y)
ys*
y*
MC(y)
MCs(y)
p
AC(y)
ys*
y*
MC(y)
MCs(y)
p
AC(y)
ys*
y*
MCs(y)
MC(y)
AC(y)
p
ys*
MCs(y)
MC(y)
AC(y)
p Loss
ys*
MCs(y)
MC(y)
AC(y)
p Loss
ys*
This loss can be eliminated in the longrun by the firm exiting the industry.
AC(y)
AC(y)
ys*
AC(y)
ys*
AC(y)
y* ys*
AC(y)
y* ys*
AC(y)
y* ys*
AC(y)
AC(y)
AC(y)
MC(y)
AC(y)
MCs(y)
ACs(y)
AVCs(y)
MCs(y)
ACs(y)
AVCs(y)
MCs(y)
p
ACs(y)
AVCs(y)
y*(p)
MCs(y)
p
ACs(y)
AVCs(y)
PS
y*(p)
y*( p )
p MCs ( z) d( z)
py * ( p )
y*( p )
MCs ( z)d( z)
py * ( p ) c v y * (p ) .
MCs(y)
p
ACs(y)
AVCs(y)
PS
y*(p)
MCs(y)
p
c v ( y * (p ))
ACs(y)
AVCs(y)
y*(p)
MCs ( z)d( z)
y*( p )
0
MCs(y)
p
ACs(y)
AVCs(y)
Revenue
= py*(p)
y*(p)
MCs(y)
p
ACs(y)
AVCs(y)
Revenue
= py*(p)
cv(y*(p))
y*(p)
MCs(y)
p
ACs(y)
AVCs(y)
PS
y*(p)