1. Managerial Economics-Charles W. Upton Equilibrium with Different Cost Functions

2. 2 We have discussed equilibrium when all firms, both potential and actual, have the same cost function.

3. Equilibrium with Different Cost Functions 3 We have discussed equilibrium when all firms, both potential and actual, have the same cost function. We now turn to the case where there are different cost functions.

4. Equilibrium with Different Cost Functions 4 The Graphical Analysis AC MC The basics are still the same. Each firm has a MC and AC function.

5. Equilibrium with Different Cost Functions 5 The Graphical Analysis AC MC p1p1 q1q1 At p 1, the firm will supply q 1 units

6. Equilibrium with Different Cost Functions 6 The Graphical Analysis AC MC p1p1 p2p2 q1q1 q2q2 At p 2, the firm will supply q 2 units

7. Equilibrium with Different Cost Functions 7 The Graphical Analysis AC MC p1p1 p2p2 q1q1 q2q2 At p min, the firm will supply q min units p min q min

8. Equilibrium with Different Cost Functions 8 Supply with Three Firms AC MC p1p1 q1q1 When p=p 1, only one firm produces

9. Equilibrium with Different Cost Functions 9 Supply with Three Firms AC MC p4p4 p3p3 p2p2 p1p1 q2q2 q 1 q 2 q3q3 When p rises to p 2, the first firm increases output and a second enters.

10. Equilibrium with Different Cost Functions 10 Supply with Three Firms AC MC p4p4 p3p3 p2p2 p1p1 q 2 q 3 q 1 q 2 q 3 q3q3 At p=p 3, the third firm enters

11. Equilibrium with Different Cost Functions 11 Supply with Three Firms AC MC p4p4 p3p3 p2p2 p1p1 q 2 q 3 q 4 q 1 q 2 q 3 q 4 q 3 q 4 At p=p 4, even more output

12. Equilibrium with Different Cost Functions 12 Supply with Three Firms AC MC p4p4 p3p3 p2p2 p1p1 q 2 q 3 q 4 q 1 q 2 q 3 q 4 q 3 q 4 Each firm sets MC=P

13. Equilibrium with Different Cost Functions 13 The Industry Supply Curve p1p1 q1q1 No output until price rises to p 1. There, the first firm begins producing.

14. Equilibrium with Different Cost Functions 14 The Industry Supply Curve p2p2 p1p1 q 1 q 2 As price rises from p 1 to p 2, the first firm moves along its marginal cost curve.

15. Equilibrium with Different Cost Functions 15 The Industry Supply Curve p2p2 p1p1 q 1 q 2 q2+q2q2+q2 At p 2, the second firm begins producing.

16. Equilibrium with Different Cost Functions 16 The Industry Supply Curve p3p3 p2p2 p1p1 q 1 q 2 q2+q2q2+q2 q3+q3q3+q3 As price rises from p 2 to p 3, the first two firms moves along their marginal cost curves.

17. Equilibrium with Different Cost Functions 17 The Industry Supply Curve p3p3 p2p2 p1p1 q 1 q 2 q2+q2q2+q2 q3+q3q3+q3 q3+q3+q3q3+q3+q3 At p 3 the third firm enters.

18. Equilibrium with Different Cost Functions 18 The Industry Supply Curve p4p4 p3p3 p2p2 p1p1 q 1 q 2 q2+q2q2+q2 q3+q3q3+q3 q3+q3+q3q3+q3+q3 q4+q4+q4q4+q4+q4 As price rises to p 4 and beyond, all three firms move along their marginal cost curves.

19. Equilibrium with Different Cost Functions 19 The Industry Supply Curve p4p4 p3p3 p2p2 p1p1 q 1 q 2 q2+q2q2+q2 q3+q3q3+q3 q3+q3+q3q3+q3+q3 q4+q4+q4q4+q4+q4 1 1 2 3 1 2

20. Equilibrium with Different Cost Functions 20 The Industry Supply Curve p4p4 p3p3 p2p2 p1p1 q 1 q 2 q2+q2q2+q2 q3+q3q3+q3 q3+q3+q3q3+q3+q3 q4+q4+q4q4+q4+q4 1 1 2 3 1 2

21. Equilibrium with Different Cost Functions 21 The Industry Supply Curve p4p4 p3p3 p2p2 p1p1 q 1 q 2 q2+q2q2+q2 q3+q3q3+q3 q3+q3+q3q3+q3+q3 q4+q4+q4q4+q4+q4 1 1 2 3 1 2

22. Equilibrium with Different Cost Functions 22 The Industry Supply Curve p4p4 p3p3 p2p2 p1p1 q 1 q 2 q2+q2q2+q2 q3+q3q3+q3 q3+q3+q3q3+q3+q3 q4+q4+q4q4+q4+q4 1 1 2 3 1 2

23. Equilibrium with Different Cost Functions 23 The Supply Curve as a Horizontal Sum P Q

24. Equilibrium with Different Cost Functions 24 The Supply Curve as a Horizontal Sum P Q p5p5 235

25. Equilibrium with Different Cost Functions 25 The Supply Curve as a Horizontal Sum P Q p5p5 p6p6

26. Equilibrium with Different Cost Functions 26 End ©2005 Charles W. Upton