Market Environments
Monopolistic Competition: Many firms each making a slightly different product. Each firm’s output level is small relative to the total. Pure Competition (the focus of this chapter): Many firms, all making the same product. Each firm’s output level is small relative to the total.
$/output unit
p=MC and MC slopes upwards.
pe MCs(y) y’ ys* y
The Short-run Supply of Case (b)
If this case, p is very low, such that p < MC(0) and MC is increasing for all y>0. Note this case, the profit is –F.
Different types of firms
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.
MC(y)
p’
Πs
AC(y)
ys*
y
ys* is profit-maximizing in this short-run.
The Firm’s Long & Short-Run Supply Decisions $/output unit
The Firm’s Long & Short-Run Supply Decisions $/output unit
ACs(y) MC(y) MCs(y)
AC(y)
y
The Firm’s Long & Short-Run Supply Decisions $/output unit
ACs(y) MC(y) MCs(y) p’
The Firm’s Long & Short-Run Supply Decisions $/output unit
ACs(y) MC(y) MCs(y) p’
Πs
AC(y)
Π
ys* y* y
The firm can increase profit by increasing x2 and producing y* output units.
Pure Competition
$/output unit Market Supply
pe
Market Demand
Y
Pure Competition
$/output unit Market Supply
p’ pe p” At a price of p’, zero is demanded from the firm.
ACs(y) MC(y) MCs(y) p” Loss ys* y
AC(y)
This loss can be eliminated in the longrun by the firm exiting the industry.
The Firm’s Long & Short-Run Supply Decisions $/output unit
How about the Long-Run Supply?
A competitive firm’s long-run profit function is
Π(y) = py − c(y). The long-run cost c(y) of producing y units of output consists only of variable costs.
/ Chapter Twenty-Two Firm Supply
The purpose of this chapter
We 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) ]AC(y)Fra bibliotekys*
y*
y
ys* is profit-maximizing in this short-run.
The Firm’s Long & Short-Run Supply Decisions $/output unit
ACs(y) MC(y) MCs(y) p’
Πs
AC(y)
ys*
y*
y
ys* is profit-maximizing in this short-run.
The Firm’s Long-Run Supply Decision
Additionally, the firm’s economic profit level must not be negative since then the firm would exit the industry. So, Π(y) = py − c(y) ≥ 0 c(y) ⇒ p≥ = AC(y). y
ys*
y
The Firm’s Short-Run Supply Decision
max Πs (y) = py − cs (y).
y≥0
Case (b) ys* = 0: Π(y)
dΠs (y) C = p − M s (y) ≤ 0 dy
* at y = ys = 0.
y ys* = 0
The Short-run Supply Curve of Case (a)
Firm’s MC
pe
Firm’s demand curve
y The individual firm’s technology causes it always to supply only a small part of the total quantity demanded at the market price.
The Firm’s Long-Run Supply Decision
$/output unit The firm’s long-run supply curve MC(y)
AC(y)
y
The Firm’s Long-Run Supply Decision
How is the firm’s long-run supply curve related to all of its short-run supply curves?
Equivalently, c (y) p≥ v = AVCs (y). y
The Firm’s Short-Run Supply Decision
$/output unit
p > AVCs(y) MCs(y) ACs(y) AVCs(y)
ys* > 0.
p < AVCs(y)
The firm’s short-run supply curve y ys* = 0.
Market Environments
Dominant Firm: Many firms, but one much larger than the rest. The large firm’s decisions affect the payoffs of each small firm. Decisions by any one small firm do not noticeably affect the payoffs of any other firm.
MC(y)
AC(y)
y
The Firm’s Long & Short-Run Supply Decisions $/output unit
MC(y)
p’
AC(y)
ys*
y
ys* is profit-maximizing in this short-run.
The Firm’s Long & Short-Run Supply Decisions $/output unit
The Firm’s Short-Run Supply Decision
max Πs (y) = py − cs (y).
y≥0
Case (a) ys* > 0: Π(y)
dΠs (y) (i) = p − MCs (y) = 0 dy (ii) d Πs (y) dy
2 2 * < 0 at y = ys .
The Firm’s Long-Run Supply Decision
The firm’s long-run supply level decision is to
max Π(y) = py − c(y).
y≥0
The 1st and 2nd-order maximization conditions are, for y* > 0, p = MC(y) and dMC(y) > 0. dy
Pure Competition