1、Chapter Twenty-TwoFirm SupplyThe purpose of this chapterWe study how much a firm decides to supply?Note the differences between a consumer and a firm:A consumer is passive, taking prices as given;A firm has much more choices entry, exit, price-setting (in some cases) Different types of firmsMonopoly

2、: 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.Market EnvironmentsDominant Firm: Many firms, but one much larger than the rest. The large firms decisions affect the payoffs of e

3、ach small firm. Decisions by any one small firm do not noticeably affect the payoffs of any other firm. Market EnvironmentsMonopolistic Competition: Many firms each making a slightly different product. Each firms output level is small relative to the total.Pure Competition (the focus of this chapter

4、): Many firms, all making the same product. Each firms output level is small relative to the total.Pure CompetitionA 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.So what is the demand curve faced by the indiv

5、idual firm?Pure CompetitionY$/output unitMarket SupplyMarket DemandpePure Competitiony$/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 DemandWhat does it mean

6、 to say that an individual firm is “small”$/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 DecisionCase (a) ys* 0:P(y)yys*The Firms Short-Run Supply Deci

7、sionCase (b) ys* = 0:P(y)yys* = 0The Short-run Supply Curve of Case (a)$/output unitypeyp=MC and MC slopes upwards. MCs(y)ys*The Short-run Supply of Case (b) If this case, p is very low, such that p 0.Note this case, the profit is F.When will (a) or (b) happen?Since y=0 is always a feasible choice,

8、if the optimal y 0, it must beI.e.,Equivalently, The Firms Short-Run Supply DecisionAVCs(y)ACs(y)MCs(y)p 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 DecisionShut-down is not the same as exi

9、t.Shutting-down means producing no output (but the firm is still in the industry and suffers its fixed cost).Exiting means leaving the industry, which the firm can do only in the long-run.How about the Long-Run Supply?A competitive firms long-run profit function isThe long-run cost c(y) of producing

10、 y units of output consists only of variable costs.The Firms Long-Run Supply DecisionThe firms long-run supply level decision is toThe 1st and 2nd-order maximization conditions are, for y* 0,The Firms Long-Run Supply DecisionAdditionally, the firms economic profit level must not be negative since th

11、en the firm would exit the industry. So,The Firms Long-Run Supply DecisionMC(y)AC(y)y$/output unitThe firms long-runsupply curveThe Firms Long-Run Supply DecisionHow 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)

12、y$/output unitACs(y)MCs(y)The Firms Long & Short-Run Supply DecisionsMC(y)AC(y)y$/output unitACs(y)MCs(y)pys*y*ys* is profit-maximizing in this short-run.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.PsThe Firms Long &

13、 Short-Run Supply DecisionsMC(y)AC(y)y$/output unitACs(y)MCs(y)pys*y*The firm can increase profit by increasingx2 and producing y* output units.PsPThe Firms Long & Short-Run Supply DecisionsMC(y)AC(y)y$/output unitACs(y)MCs(y)p”ys*ys* is loss-minimizing in this short-run.The Firms Long & Short-Run S

14、upply 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-maximizing

15、in this short-run.The Firms Long & Short-Run Supply DecisionsMC(y)AC(y)y$/output unitpys*ys* is profit-maximizing in this short-run.PsThe Firms Long & Short-Run Supply DecisionsMC(y)AC(y)y$/output unitpys*ys* is profit-maximizing in this short-run.y* is profit-maximizing in the long-run.y*PThe Firms

16、 Long & Short-Run Supply DecisionsMC(y)AC(y)y$/output unitpys*y*PsPThe firm can increase profit by reducingx2 and producing y* units of output.The Firms Long & Short-Run Supply DecisionsMC(y)AC(y)y$/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 curveProducers Surplus RevisitedThe firms producers surplus is defined as:Producers Surplus Revisitedy$/output unitAVCs(y)ACs(y)MCs(y)pPSy*(p)Producers Surplus RevisitedPS = Rev