Firm Supply Demand Curve Facing Competitive Firm Supply Decision of a Competitive Firm Producer s Surplus and Profits Long Run The Demand Curve Facing a Competitive Firm p market price p 0 y Supply Decision of a Competitive Firm Problem of a competitive firm max py c y y Revenues Costs and Profits py p y c y y Maximum Profits py p c y y y Optimal Quantity Supplied Firm maximizes max py c y y Necessary condition for optimal choice c y p MC y y An Example Short run cost function c y y 1 2 Marginal cost function MC y 2 y An Example Average variable costs 2 y AVC y y y Average costs 2 y 1 1 AC y y y y y An Example Profit maximization max py y 1 2 y Necessary condition p 2y An Example p AC MC AVC 2 0 1 y An Example Profits p AC p MC AVC AC y AVC y 0 y y Producer s Surplus Producer s surplus Area below price above supply curve Alternatively py below supply curve where area below supply curve MC cv y An Example Producer s Surplus p AC p MC AVC 0 y y An Example Producer s Surplus p AC p MC AVC AVC y 0 y y Producer s Surplus and Profits Producer s surplus py cv y Profits py cv y F An Example Producer s Surplus and Profits p AC p MC AVC AC y AVC y 0 y y An Example Output p y 2 Profits py y 2 p 1 2 4 1 An Example Profits p 2 4 Producer s surplus 1 1 p p p 2 2 4 2 One Exception y1 or y2 MC AC MC AVC AC AVC p y1 y2 y A Second Exception Shutdown Profits if firm produces py cv y F Profits if firm does not produce F Producing is better if py cv y 0 A Second Exception Shutdown Producing is better if py cv y 0 Rearrange Produce only if cv y p y Shutdown MC AC MC AVC AC AVC p y y The Firm s Supply Curve AC MC AVC MC AC AVC 0 y Long and Short Run Supply in Consultant Firm Example MC S y MC y p p 0 MC L y 91 yL yS y Shutdown in the Short Run and in the Long Run In the short run the shutdown condition is cv y p AVC y y In the long run the shutdown condition is c y p AC y y
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