Production- Perfeet Cornpetition The Supply Decision The firm wishes to choose output ise profits. Profits are given by the following equation The firm will keep increasing output until profits start to decline. If A/Ay<o the firm could decrease output to Icrease profit. If AT/Ay >0 an increase in output would increase profit. Hence the firm sets y so that Ax/Ay=0. Or maximisation can be achieved by setting d/dy=0 in the standard way △霄’-霄 ={p(y-y)-(c(y)-c(y)}/△y= △c(y) △c(y) Simply put p= MC(y) at the optimum. The competitive firm operates at price equals marginal cost. The supply curve for the mply the marg letion-Perfeer Competition The Supply Curve The firms supply curve is not the whole of the marginal cost curve. There are two exception MC MO lVC The firm would never operate at yL since more profit could be made at yH. Since C is downward sloping at yL the cost of producing an extra unit is falling(and below p")and it will always be profitable to produce more Moreover the firm would never UN. Profits(excluding fixed costs) are negative since the variable cost per unit is greater than the price received per unit. The firm would rather Hence the(short run) supply curve is zero until MC >AVC and then supply is the marginal cost curvProduction — Perfect Competition 3 The Supply Decision • The firm wishes to choose output to maximise profits. Profits are given by the following equation: π = py − c(y) =⇒ max y π = max y py − c(y) • The firm will keep increasing output until profits start to decline. If ∆π/∆y < 0 the firm could decrease output to increase profit. If ∆π/∆y > 0 an increase in output would increase profit. Hence the firm sets y so that ∆π/∆y = 0. • Or maximisation can be achieved by setting dπ/dy = 0 in the standard way. ∆π ∆y = π 0 − π ∆y = {p(y 0 − y) − (c(y 0 ) − c(y))} /∆y = p − ∆c(y) ∆y = 0 =⇒ p = ∆c(y) ∆y • Simply put p = MC(y) at the optimum. The competitive firm operates at price equals marginal cost. • The supply curve for the firm is simply the marginal cost curve. Well, not quite. Production — Perfect Competition 4 The Supply Curve • The firm’s supply curve is not the whole of the marginal cost curve. There are two exceptions. . . . . . . . . . . . . ................................................................................................................................................................................................................................................................................ .................................................................................................................................................................................................................................................................................. .................................................................................................................................................................................................................................................... .................................................................................................................................................................................................................................................... 0 p y p ∗ 0 p y p ∗ MC MC yL yH AV C yN ....................................... . ............................................................... ................................................................................................................ • The firm would never operate at yL since more profit could be made at yH. Since MC is downward sloping at yL, the cost of producing an extra unit is falling (and below p ∗ ) and it will always be profitable to produce more. • Moreover, the firm would never produce at yN . Profits (excluding fixed costs) are negative since the variable cost per unit is greater than the price received per unit. The firm would rather produce nothing at all. • Hence the (short run) supply curve is zero until MC > AV C and then supply is the marginal cost curve