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1、Chapter Twenty-Two,Firm Supply,Firm Supply,How does a firm decide how much product to supply? This depends upon the firms technology market environment goals competitors behaviors,Market Environments,Are there many other firms, or just a few? Do other firms decisions affect our firms payoffs? Is tra
2、ding anonymous, in a market? Or are trades arranged with separate buyers by middlemen?,Market Environments,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.,Market Enviro
3、nments,Dominant Firm: Many firms, but one much larger than the rest. The large firms decisions affect the payoffs of each small firm. Decisions by any one small firm do not noticeably affect the payoffs of any other firm.,Market Environments,Monopolistic Competition: Many firms each making a slightl
4、y different product. Each firms output level is small relative to the total. Pure Competition: Many firms, all making the same product. Each firms output level is small relative to the total.,Market Environments,Later chapters examine monopoly, oligopoly, and the dominant firm. This chapter explores
5、 only pure competition.,Pure Competition,A firm in a perfectly competitive market knows it has no influence over the market price for its product. The firm is a market price-taker. The firm is free to vary its own price.,Pure Competition,If the firm sets its own price above the market price then the
6、 quantity demanded from the firm is zero. If the firm sets its own price below the market price then the quantity demanded from the firm is the entire market quantity-demanded.,Pure Competition,So what is the demand curve faced by the individual firm?,Pure Competition,Y,$/output unit,Market Supply,M
7、arket Demand,pe,Pure Competition,y,$/output unit,Market Supply,pe,p,At a price of p, zero is demanded from the firm.,Market Demand,Pure Competition,y,$/output unit,Market Supply,pe,p,p”,At a price of p” the firm faces the entire market demand.,At a price of p, zero is demanded from the firm.,Market
8、Demand,Pure Competition,So the demand curve faced by the individual firm is .,Pure Competition,y,$/output unit,Market Supply,pe,p,p”,At a price of p” the firm faces the entire market demand.,At a price of p, zero is demanded from the firm.,Market Demand,Pure Competition,Y,$/output unit,pe,p,p”,Marke
9、t Demand,Smallness,What does it mean to say that an individual firm is “small relative to the industry”?,Smallness,$/output unit,y,Firms MC,The individual firms technology causes italways to supply only a small part of the total quantity demanded at the market price.,Firms demand curve,pe,The Firms
10、Short-Run Supply Decision,Each firm is a profit-maximizer and in a short-run. Q: How does each firm choose its output level?,The Firms Short-Run Supply Decision,Each firm is a profit-maximizer and in a short-run. Q: How does each firm choose its output level? A: By solving,The Firms Short-Run Supply
11、 Decision,What can the solution ys* look like?,The Firms Short-Run Supply Decision,What can the solution ys* look like?(a) ys* 0:,P(y),y,ys*,The Firms Short-Run Supply Decision,What can the solution y* look like?(b) ys* = 0:,P(y),y,ys* = 0,The Firms Short-Run Supply Decision,For the interior case of
12、 ys* 0, the first-order maximum profit condition is,That is,So at a profit maximum with ys* 0, themarket price p equals the marginalcost of production at y = ys*.,The Firms Short-Run Supply Decision,For the interior case of ys* 0, the second-order maximum profit condition is,That is,So at a profit m
13、aximum with ys* 0, thefirms MC curve must be upward-sloping.,The Firms Short-Run Supply Decision,$/output unit,y,pe,ys*,y,MCs(y),The Firms Short-Run Supply Decision,$/output unit,y,pe,ys*,y,At y = ys*, p = MC and MCslopes upwards. y = ys* is profit-maximizing.,MCs(y),The Firms Short-Run Supply Decis
14、ion,$/output unit,y,pe,ys*,y,At y = ys*, p = MC and MCslopes upwards. y = ys* is profit-maximizing.,At y = y, p = MC and MC slopes downwards.y = y is profit-minimizing.,MCs(y),The Firms Short-Run Supply Decision,$/output unit,y,pe,y,At y = ys*, p = MC and MCslopes upwards. y = ys* is profit-maximizi
15、ng. So a profit-max. supply level can lie only on the upwards sloping part of the firms MC curve.,MCs(y),ys*,The Firms Short-Run Supply Decision,But not every point on the upward-sloping part of the firms MC curve represents a profit-maximum.,The Firms Short-Run Supply Decision,But not every point o
16、n the upward-sloping part of the firms MC curve represents a profit-maximum. The firms profit function is If the firm chooses y = 0 then its profit is,The Firms Short-Run Supply Decision,So the firm will choose an output level y 0 only if,The Firms Short-Run Supply Decision,So the firm will choose an output level y 0 only if I.e., only ifEquivalently, on
