L18
Supply of a firm
Producers
 Producers:
y  f (K , L)
 Maximize
profit
- cost minimization (engineers)
(IRS, CRS, DRS)
C ( y)
- Today: level of production (managers)
- Supply function y(p)
Today and Next Lecture
 Technology
for free? Typically fixed costs F
 F does not depend on the level of y
 Cost functions and optimal supply y
The following lecture:
 Partial equilibrium model (one industry)
D ( p )  12  p
Q: Number of firms
Cost Curves
 We
add Fixed Cost F (does not depend on y)
 Total cost = Fixed Cost + Variable Cost
TC ( y)  F  C ( y)

Average costs: ATC, AFC, AVC
TC ( y ) F C ( y )


y
y
y
 Marginal
cost MC
TC ( y )
MC 
y
Example: Total Cost
C ( y)  y2
TC 
F  $1
Example: Average Cost
C ( y)  y2
F  $1
ATC 
Example: Marginal Cost
C ( y)  y2
F  $1
Average and Marginal Cost
 Does
MC always cut ATC at the minimal
point? (Intuition)
 Minimal Efficient Scale (MES)
 Find MES given C ( y )  y 2
F  $1
pall
Equality of ATC and MC at MES
MES: Two methods
F  $1
C ( y)  y2
pall
QUIZ
Assume
Q: Minimal efficient scale is equal to
A)
pall
B)
C)
D)
Firm’s supply
 Decisions:
Acquire technology or not (cost F)
If yes, how much to supply (y)
Profit Maximizing y (price takers)
 What
is the optimal level of y given p, F
  py  TC ( y)
 Let
Profit Maximizing y (price takers)
  py  TC ( y)
 Secret
of happiness (FOC)
 Non-negative
profit
Individual supply and profit
C ( y)  y2
F  $1
Individual supply and profit
C ( y)  y2
F  $1