Supply

Question 1

When are firms price takers?

Answer 1

When they are small relative to the size of the market so they are unable to influence the market price

Question 2

What is the supply curve?

Answer 2

The graphical representation of how output relates to price
From MC(q) = p at interior optima and the U-shaped graph of MC, the supply curve is the upward sloping part of the MC curve
From the condition that a firm must have AVC(q) < p to have profitable production, the supply curve is the upward sloping part of the MC curve which lies above the AVC curve (beneath the start it is a vertical line at q=0)
Note that in SR firm may produce with negative profit (between AVC and AC)

Question 3

What is Producer’s Surplus?

Answer 3

The difference between how much a firm would have been willing to sell z units of a good for (p’) and how much they actually sell y units for (p’’)
PS = area to left of supply curve
= p’‘y - p’z - ∫_z^yp(q)dq
= ∫₀^y(p’’ - MC(q))dq
= area between p’’ and MC
= p’‘y - ∫₀^yMC(q)dq
= p’‘y - c_v(y)
= p’‘y - AVC(y)y

Question 4

What is the relationship between profit, PS, and fixed costs?

Answer 4

PS has no dependence on F
π = PS - F

Question 5

What is a firm’s long run supply curve?

Answer 5

The part of the long run MC curve that is on or above the long run AC curve as otherwise the firm would be making a loss and would exit the market

Question 6

How could you illustrate an industry supply curve?

Answer 6

A (q, p) graph showing the supply curves for 1, 2, and 3 firms, which will be straight lines rotated clockwise about origin, and the minimum price p* which allows for nonnegative profits
The industry supply curve will be q = 0 up to p*, then S_{1</sub until S2 crosses p*, then S2</sub until S3 crosses p*, then S3
The curve looks flat as number of firms grows so firms will make zero profits}