Supply Flashcards
What two decisions do firms have to make regarding supply?
Shutdown decision: is it more profitable to produce q* or to shut down?
Output decision: if the firm produces what output maximises profit
Where are profits maximised?
Where dpi(q)/dq = 0
When marginal profits are zero so marginal revenue= marginal cost
When does the firm shut down?
If revenue < variable costs
Marginal revenue
In perfect competition MR=p
Normal profits
When resources are used to get the same return as the next best alternative
Abnormal profits
When resources are used to get a greater return than the next best alternative
How are the market supply and firm supply curves related?
The market supply curve is the horizontal sum of the supply curves of all firms
When do firms shut down in the long run?
If revenue< costs at q*
Are profits bigger in SR or LR
Long run
When are the number of firms in a market fixed?
In SR. In the LR firms can enter abs exit the market
When do firms enter the market?
In LR when p>ATC
Constant cost market
An increase in supply doesn’t affect prices of inputs
Increasing cost market
Increase in supply increases input prices of industry is an important source of input demand
Decreasing cost market
Increase in supply lowers input prices because of scale effects
What does the LRMS curve look like in a constant cost market?
It’s flat
