ch22 firm supply

7/25/2019 Ch22 Firm Supply

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Chapter Twenty-Two

Firm Supply


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Firm Supply

How does a firm decide how muchproduct to supply? This dependsupon the firms

technology

market environment

goals

competitors behaviors


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Market Environments

Are there many other firms, or ust afew?

!o other firms decisions affect our

firms payoffs?

"s trading anonymous, in a market?#r are trades arranged with separate

buyers by middlemen?


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Market Environments

$onopoly% &ust one seller thatdetermines the 'uantity supplied andthe market(clearing price)

#ligopoly% A few firms, the decisionsof each influencing the payoffs of theothers)


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Market Environments

$onopolistic *ompetition% $anyfirms each making a slightly differentproduct) +ach firms output level is

small relative to the total)ure *ompetition% $any firms, all

making the same product) +ach

firms output level is small relative tothe total)


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Market Environments

This chapter e-plores purecompetition)


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Pure Competition

"f the firm sets its own price above themarket price then the 'uantitydemanded from the firm is .ero)

"f the firm sets its own price below themarket price then the 'uantitydemanded from the firm is the entire

market 'uantity(demanded)


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Pure Competition

So what is the demand curve facedby the individual firm?


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Pure Competition

/

01output unit

$arket Supply

$arket !emand

pe


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Pure Competition

y

01output unit

$arket Supply

pe

p

At a price of p, .ero isdemanded from the firm)

$arket !emand


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Pure Competition

y

01output unit

$arket Supply

pe

p

p2

At a price of p2 the firm faces the entiremarket demand)

At a price of p, .ero isdemanded from the firm)

$arket !emand


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Pure Competition

So the demand curve faced by theindividual firm is )))


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Pure Competition

/

01output unit

pe

p

p2

$arket !emand


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Smallness

3hat does it mean to say that anindividual firm is 4small relative tothe industry2?


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The Firms Short-Run Supply Decision

+ach firm is a profit(ma-imi.er and ina short(run)

5% How does each firm choose its

output level?


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+ach firm is a profit(ma-imi.er and ina short(run)

5% How does each firm choose its

output level?A% 6y solving


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3hat can the solution ys7 look like?


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3hat can the solution ys7 look like?

8a9 ys7 : ;%8y9

yys7


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For the interior case of ys7 : ;, the first(order ma-imum profit conditionis

That is,=

So at a profit ma-imum with ys7 : ;, themarket price p e'uals the marginalcost of production at y < ys7)


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For the interior case of ys7 : ;, the second(order ma-imum profit conditionis

That is,

So at a profit ma-imum with ys7 : ;, the

firms $* curve must be upward(sloping)


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01output unit

y

pe

ys7y

$*s8y9


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01output unit

y

pe

ys7y

At y < ys7, p < $* and $*slopes upwards) y < ys7 is

profit(ma-imi.ing)

$*s8y9


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01output unit

y

pe

ys7y


profit(ma-imi.ing)

At y < y, p < $* and $* slopes downwards)

y < y is profit(minimi.ing)

$*s8y9


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01output unit

y

pe

y


profit(ma-imi.ing)

So a profit(ma-) supply level can lie only on the upwards sloping part of the firms $* curve)

$*s8y9

ys7


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6ut not every point on the upward(sloping part of the firms $* curverepresents a profit(ma-imum)


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So the firm will choose an outputlevel y : ; only if


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So the firm will choose an outputlevel y : ; only if

")e), only if

+'uivalently, only if


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A=*s8y9

A*s8y9

$*s8y9

01output unit

y


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A=*s8y9

A*s8y9

$*s8y9

01output unit

y


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A=*s8y9

A*s8y9

$*s8y9

p A=*s8y9 ys7 : ;)01output unit

y


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A=*s8y9

A*s8y9

$*s8y9

p A=*s8y9 ys7 < ;)

The firms short(runsupply curve

01output unit

y

p A=*s8y9 ys7 : ;)


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A=*s8y9

A*s8y9

$*s8y9

The firms short(runsupply curve

Shutdown point

01output unit

y


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Shut(down is not the same as e-it)Shutting(down means producing no

output 8but the firm is still in the

industry and suffers its fi-ed cost9)+-iting means leaving the industry,

which the firm can do only in the

long(run)


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The Firms Lon-Run Supply Decision

The long(run is the circumstance inwhich the firm can choose amongstall of its short(run circumstances)

How does the firms long(run supplydecision compare to its short(runsupply decisions?


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A competitive firms long(run profitfunction is

The long(run cost c8y9 of producing yunits of output consists only ofvariable costs since all inputs are

variable in the long(run)


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The firms long(run supply leveldecision is to

The >st and nd(order ma-imi.ationconditions are, for y7 : ;,=


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$*8y9

A*8y9

y

01output unit


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$*8y9

A*8y9

y

01output unit

p : A*8y9


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$*8y9

A*8y9

y

01output unit

p : A*8y9


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$*8y9

A*8y9

y

01output unit

The firms long(runsupply curve


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How is the firms long(run supplycurve related to all of its short(runsupply curves?

The Firms Lon ! Short-Run Supply


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The Firm s Lon ! Short Run Supply

Decisions

$*8y9

A*8y9

y

01output unit

A*s8y9

$*s8y9



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Decisions

$*8y9

A*8y9

y

01output unit

A*s8y9

$*s8y9

p

ys7 y7

ys7 is profit(ma-imi.ing in this short(run)



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Decisions

$*8y9

A*8y9

y

01output unit

A*s8y9

$*s8y9

p

ys7 y7


s



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Decisions

$*8y9

A*8y9

y

01output unit

A*s8y9

$*s8y9

p

ys7 y7

The firm can increase profit by increasing

-and producing y7 output units)

s



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Decisions

$*8y9

A*8y9

y

01output unit

A*s8y9

$*s8y9

p2

ys7

ys7 is loss(minimi.ing in this short(run)



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Decisions

$*8y9

A*8y9

y

01output unit

A*s8y9

$*s8y9

p2

ys7

ys7 is loss(minimi.ing in this short(run)

@oss



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Decisions

$*8y9

A*8y9

y

01output unit

A*s8y9

$*s8y9

p2

ys7

This loss can be eliminated in the long(

run by the firm e-iting the industry)

@oss



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Decisions

$*8y9

A*8y9

y

01output unit



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Decisions

$*8y9

A*8y9

y

01output unit

p

ys7




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Decisions

$*8y9

A*8y9

y

01output unit

p

ys7


s



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Decisions

$*8y9

A*8y9

y

01output unit

p

ys7


y7 is profit(ma-imi.ing in the long(run)

y7



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Decisions

$*8y9

A*8y9

y

01output unit

p

ys7


y7 is profit(ma-imi.ing in the long(run)

y7



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Decisions

$*8y9

A*8y9

y

01output unit

p

ys7y7

s

The firm can increase profit by reducing

-and producing y7 units of output)



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e s o ! S o u Supp y

Decisions

$*8y9

A*8y9

y

01output unit

Short(run supply curves

@ong(run supply curve

P " S l R i it "


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Pro"ucers Surplus Revisite"

The firms producers surplus is theaccumulation, unit by e-tra unit ofoutput, of e-tra revenue less e-tra

production cost)How is producers surplus related

profit?

P " S l R i it "


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y

01output unit

A=*s8y9

A*s8y9

$*s8y9

P " S l R i it "


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y

01output unit

A=*s8y9

A*s8y9

$*s8y9


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P " S l R i it "


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y

01output unit

A=*s8y9

A*s8y9

$*s8y9

p

S

y78p9

P " S l R i it "


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So the firms producers surplus is

=

That is, S < evenue ( =ariable *ost)

P " S l R i it "


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y

01output unit

A=*s8y9

A*s8y9

$*s8y9

p

S

y78p9



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y

01output unit

A=*s8y9

A*s8y9

$*s8y9

p

y78p9



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y

01output unit

A=*s8y9

A*s8y9

$*s8y9

p

y78p9

evenue< py78p9



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Pro"ucer s Surplus Revisite"

y

01output unit

A=*s8y9

A*s8y9

$*s8y9

p

y78p9

evenue< py78p9

cv8y78p99



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y

01output unit

A=*s8y9

A*s8y9

$*s8y9

p

S

y78p9



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S < evenue ( =ariable *ost)rofit < evenue ( Total *ost

< evenue ( Fi-ed *ost

( =ariable *ost)So, S < rofit B Fi-ed *ost)

#nly if fi-ed cost is .ero 8the long(

run9 are S and profit the same)

ch22 firm supply

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