L17 Supply of a firm.

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Presentation transcript:

L17 Supply of a firm

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

Today and Next Lecture Technology for free? Typically fixed costs F F does not depend on the level of y Optimal supply y Following lecture Partial equilibrium model (one industry) Equilibrium price given N firms Free entry: 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 pall

Example: Average Cost pall

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 pall

MES: Two methods pall

Profit Maximizing y (price takers) What is the optimal level of y given p, F Secret of happiness (FOC) Non-negative profit

Individual supply and profit pall

Individual supply and profit pall

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