Chapter Twenty-Two
Firm Supply
厂商供给
Structure
Market environments
Market demand for a competitive firm
Short-run supply decision
Upward sloping MC curve
Shut-down condition
Long-run supply decision
Comparing long-run and short-run
decisions.
Producer’s surplus and profits
Firm Supply
How does a firm decide how much
product to supply? This depends
upon the firm’s
technology
market environment
goals
competitors’ behaviors
Market Environments
Are there many other firms,or just a
few?
Do other firms’ decisions affect our
firm’s payoffs?
Is trading anonymous,in a market?
Or are trades arranged with separate
buyers by middlemen?
Market Environments
Monopoly (垄断）,Just one seller
that determines the quantity supplied
and the market-clearing price.
Oligopoly （ 寡头垄断）,A few firms,
the decisions of each influencing the
payoffs of the others.
Market Environments
Dominant Firm,Many firms,but one
much larger than the rest,The large
firm’s 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 （ 垄断竞争
）,Many firms each making a
slightly different product,Each
firm’s output level is small relative to
the total.
Pure Competition,Many firms,all
making the same product,Each
firm’s output level is small relative to
the total.
Market Environments
Later chapters examine monopoly,
oligopoly,and the dominant firm.
This chapter explores 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 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
Market 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 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”
Market Demand
Smallness
What does it mean to say that an
individual firm is,small relative to
the industry”?
Smallness
$/output unit
y
Firm’s MC
The individual firm’s technology causes it
always to supply only a small part of the
total quantity demanded at the market price.
Firm’s demand
curvep
e
The Firm’s 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 Firm’s 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 solvingm ax ( ) ( ).
y s s
y py c y

0
The Firm’s Short-Run Supply Decision
m ax ( ) ( ).
y s s
y py c y

0
What can the solution ys* look like?
The Firm’s Short-Run Supply Decision
m ax ( ) ( ).
y s s
y py c y

0
What can the solution ys* look like?
(a) ys* > 0:
(y)
yys*
( )
( )
( )
( )
( )
.
*
i
d y
dy
p MC y
ii
d y
dy
at y y
s
s
s
s


0
0
2
2
The Firm’s Short-Run Supply Decision
m ax ( ) ( ).
y s s
y py c y

0
What can the solution y* look like?
(b) ys* = 0:
(y)
y
ys* = 0
d y
dy
p MC y
at y y
s
s
s
( )
( )
.*


0
0
The Firm’s Short-Run Supply Decision
For the interior case of ys* > 0,the first-
order maximum profit condition isd y
dy p MC y
s s? ( ) ( ), 0
That is,p MC ys s? ( ).*
So at a profit maximum with ys* > 0,the
market price p equals the marginal
cost of production at y = ys*.
The Firm’s Short-Run Supply Decision
For the interior case of ys* > 0,the second-
order maximum profit condition isd y
dy
d
dy
p MC y dM C y
dy
s
s
s
2
2 0
( ) ( ) ( ),
That is,
dM C y
dy
s s( ),
*
0
So at a profit maximum with ys* > 0,the
firm’s MC curve must be upward-sloping.
The Firm’s Short-Run Supply Decision
$/output unit
y
pe
ys*y’
MCs(y)
The Firm’s Short-Run Supply Decision
$/output unit
y
pe
ys*y’
At y = ys*,p = MC and MC
slopes upwards,y = ys* is
profit-maximizing.
MCs(y)
The Firm’s Short-Run Supply Decision
$/output unit
y
pe
ys*y’
At y = ys*,p = MC and MC
slopes upwards,y = ys* is
profit-maximizing.
At y = y’,p = MC and MC slopes downwards.
y = y’ is profit-minimizing.
MCs(y)
The Firm’s Short-Run Supply Decision
$/output unit
y
pe
y’
At y = ys*,p = MC and MC
slopes upwards,y = ys* is
profit-maximizing.
So a profit-max.
supply level
can lie only on
the upwards
sloping part
of the firm’s
MC curve.
MCs(y)
ys*
The Firm’s Short-Run Shut-Down
Condition
But not every point on the upward-
sloping part of the firm’s MC curve
represents a profit-maximum.
But not every point on the upward-
sloping part of the firm’s MC curve
represents a profit-maximum.
The firm’s profit function is
If the firm chooses y = 0 then its
profit is
s s vy py c y py F c y( ) ( ) ( ).
s vy F c F( ) ( ),0 0
The Firm’s Short-Run Shut-Down
Condition
So the firm will choose an output
level y > 0 only if?
s vy py F c y F( ) ( ),
The Firm’s Short-Run Shut-Down
Condition
So the firm will choose an output
level y > 0 only if
I.e.,only if
Equivalently,only if
s vy py F c y F( ) ( ),
py c yv( ) 0
p c yy AVC yv s( ) ( ).
The Firm’s Short-Run Shut-Down
Condition
AVCs(y)
ACs(y)
MCs(y)
$/output unit
y
The Firm’s Short-Run Shut-Down
Condition
AVCs(y)
ACs(y)
MCs(y)
$/output unit
y
The Firm’s Short-Run Shut-Down
Condition
AVCs(y)
ACs(y)
MCs(y)
$/output unit
y
p? AVCs(y)
The Firm’s Short-Run Shut-Down Condition
AVCs(y)
ACs(y)
MCs(y)
p? AVCs(y) ys* > 0,$/output unit
y
The Firm’s Short-Run Shut-Down Condition
The Firm’s Short-Run Supply Decision
AVCs(y)
ACs(y)
MCs(y)
p? AVCs(y) ys* = 0,
$/output unit
y
p? AVCs(y) ys* > 0,
The Firm’s Short-Run Supply Decision
AVCs(y)
ACs(y)
MCs(y)
p? AVCs(y) ys* = 0,
The firm’s short-run
supply curve
$/output unit
y
p? AVCs(y) ys* > 0,
The Firm’s Short-Run Supply Decision
AVCs(y)
ACs(y)
MCs(y)
The firm’s short-run
supply curve
Shutdown
point
$/output unit
y
The Firm’s Short-Run Supply Decision
Shut-down is not the same as exit.
Shutting-down means producing no
output (but the firm is still in the
industry and suffers its fixed cost).
Exiting means leaving the industry,
which the firm can do only in the
long-run.
The Firm’s Long-Run Supply Decision
The long-run is the circumstance in
which the firm can choose amongst
all of its short-run circumstances.
How does the firm’s long-run supply
decision compare to its short-run
supply decisions?
The Firm’s Long-Run Supply Decision
A competitive firm’s long-run profit
function is
The long-run cost c(y) of producing y
units of output consists only of
variable costs since all inputs are
variable in the long-run.
( ) ( ).y py c y
The Firm’s Long-Run Supply Decision
The firm’s long-run supply level
decision is to
The 1st and 2nd-order maximization
conditions are,for y* > 0,
m ax ( ) ( ).
y
y py c y

0
p MC y an d
d M C y
dy
( )
( )
.0
The Firm’s Long-Run Supply Decision
Additionally,the firm’s economic
profit level must not be negative
since then the firm would exit the
industry,So,
( ) ( )
( )
( ).
y py c y
p
c y
y
AC y


0
The Firm’s Long-Run Supply Decision
MC(y)
AC(y)
y
$/output unit
The Firm’s Long-Run Supply Decision
MC(y)
AC(y)
y
$/output unit
p > AC(y)
The Firm’s Long-Run Supply Decision
MC(y)
AC(y)
y
$/output unit
p > AC(y)
The Firm’s Long-Run Supply Decision
MC(y)
AC(y)
y
$/output unit
The firm’s long-run
supply curve
Y
$/output unit
LMC=long-run supply
Cmin
Long-Run Constant Average Costs
The Firm’s Long-Run Supply Decision
How is the firm’s long-run supply
curve related to all of its short-run
supply curves?
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
ACs(y)
MCs(y)
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
ACs(y)
MCs(y)
p’
ys* y*
ys* is profit-maximizing in this short-run.
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
ACs(y)
MCs(y)
p’
ys* y*
ys* is profit-maximizing in this short-run.
s
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
ACs(y)
MCs(y)
p’
ys* y*
The firm can increase profit by increasing
x2 and producing y* output units.
s?
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
ACs(y)
MCs(y)
p”
ys*
ys* is loss-minimizing in this short-run.
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
ACs(y)
MCs(y)
p”
ys*
ys* is loss-minimizing in this short-run.
Loss
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
ACs(y)
MCs(y)
p”
ys*
This loss can be eliminated in the long-
run by the firm exiting the industry.
Loss
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
p’
ys*
ys* is profit-maximizing in this short-run.
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
p’
ys*
ys* is profit-maximizing in this short-run.
s
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
p’
ys*
ys* is profit-maximizing in this short-run.
y* is profit-maximizing in the long-run.
y*
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
p’
ys*
ys* is profit-maximizing in this short-run.
y* is profit-maximizing in the long-run.
y*
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
p’
ys*y*
s?
The firm can increase profit by reducing
x2 and producing y* units of output.
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
The Firm’s Long & Short-Run Supply
Decisions
MC(y)
AC(y)
y
$/output unit
Short-run supply curves
Long-run supply curve
Long Run and Short Run Supply
The long-run supply curve is more
elastic than the short-run supply
curve.
Because the firm has more leeway in
adjusting supply in the long-run than
in the short run.
Producer’s Surplus Revisited
The firm’s producer’s surplus is the
accumulation,by extra unit of output,
of extra revenue less extra
production cost.
How is producer’s surplus related to
profit?
Producer’s Surplus Revisited
y
$/output unit
AVCs(y)
ACs(y)
MCs(y)
Producer’s Surplus Revisited
y
$/output unit
AVCs(y)
ACs(y)
MCs(y)
Producer’s Surplus Revisited
y
$/output unit
AVCs(y)
ACs(y)
MCs(y)
p
y*(p)
Producer’s Surplus Revisited
y
$/output unit
AVCs(y)
ACs(y)
MCs(y)
p
PS
y*(p)
Producer’s Surplus Revisited
So the firm’s producer’s surplus is


PS p p MC z d z
py p MC z d z
py p c y p
s
y p
s
y p
v
( ) ( ) ( )
* ( ) ( ) ( )
* ( ) * ( ),
* ( )
* ( )



0
0
That is,PS = Revenue - Variable Cost.
Producer’s Surplus Revisited
y
$/output unit
AVCs(y)
ACs(y)
MCs(y)
p
y*(p)c y p MC z d zv s
y p
( * ( )) ( ) ( )
* ( )

0
Producer’s Surplus Revisited
y
$/output unit
AVCs(y)
ACs(y)
MCs(y)
p
y*(p)
Revenue
= py*(p)
Producer’s Surplus Revisited
y
$/output unit
AVCs(y)
ACs(y)
MCs(y)
p
y*(p)
Revenue
= py*(p)
cv(y*(p))
Producer’s Surplus - 1
y
$/output unit
AVCs(y)
ACs(y)
MCs(y)
p
PS
y*(p)
Producer’s Surplus - 2
y
$/output unit
AVCs(y)
ACs(y)
MCs(y)
p
y*(p)
Producer’s Surplus - 3
y
$/output unit
AVCs(y)
ACs(y)
MCs(y)
p
y*(p)
Producer’s Surplus Revisited
PS = Revenue - Variable Cost.
Profit = Revenue - Total Cost
= Revenue - Fixed Cost
- Variable Cost.
So,PS = Profit + Fixed Cost.
Only if fixed cost is zero (the long-
run) are PS and profit the same.