L18 Supply of a firm.

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Presentation transcript:

L18 Supply of a firm

Producers Producers: Maximize profit cost minimization (engineers) (IRS, CRS, DRS) Today: level of production (managers) Supply function y(p)

Today and Next Lecture Technology for free? Typically fixed costs F F does not depend on the level of y Cost functions and optimal supply y The following lecture: Partial equilibrium model (one industry) Q: Number of firms

Cost Curves We add Fixed Cost F (does not depend on y) Total cost = Fixed Cost + Variable Cost Average costs: ATC, AFC, AVC Marginal cost MC

Example: Total Cost

Example: Average Cost

Example: Marginal Cost

Average and Marginal Cost Does MC always cut ATC at the minimal point? (Intuition) Minimal Efficient Scale (MES) Find MES given pall

Equality of ATC and MC at MES

MES: Two methods pall

QUIZ Assume Q: Minimal efficient scale is equal to A) B) C) D) pall

Firm’s supply Decisions: Acquire technology or not (cost F) If yes, how much to supply (y)

Profit Maximizing y (price takers) What is the optimal level of y given p, F Let

Profit Maximizing y (price takers) Secret of happiness (FOC) Non-negative profit

Individual supply and profit

Individual supply and profit