1. L18
Supply of a firm

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

3. 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

4. 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

5. Example: Total Cost

6. Example: Average Cost

7. Example: Marginal Cost

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

9. Equality of ATC and MC at MES

10. MES: Two methods
pall

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

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

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

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

15. Individual supply and profit

16. Individual supply and profit