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Tutorial 9: Firms With No Market Power (cont.)

 

The Competitive Firm's Short-Run Supply Curve

In Tutorial 3b we learned that a market supply curve shows all the quantities producers are willing and able to offer for sale at various prices. Is there a supply curve for this firm? As you varied price in Question 2 of the PCFirm workbook, was there a single curve that shows how much the firm would offer for sale at each price? Yes, it is the marginal cost curve.

It is the intersection of MR and MC that determines the profit-maximizing level of output for the firm. But remember, marginal revenue equals price for firm's with no market power. So at various prices, the marginal cost curve shows the quantities a perfectly competitive firm is willing and able to offer for sale. Hence, in this model, the marginal cost curve is the price-taking firm's short run supply curve.

 

Now it's time to "do the thing".

Click on the following link to download the Perfectly Competitive Firm Workbook. Work through Question 6. This will help you improve your understanding of how to model a price-taking firm's short run supply curve. 

Return here when you have finished.

Need help downloading the Excel file?

 

This is a good time to complete, or review, GFE 19.

 

The Firm's Response to an Input Price Change Top of page.

We know that market supply reacts to changes in the price of inputs (remember SP-PENT?) So of course the firm too should react in the same sort of way, right? Let's see...

 

Now it's time to "do the thing".

Click on the following link to download the Perfectly Competitive Firm Workbook. Work through Questions 7 - 8. This will help you improve your understanding of how to model a price-taking firm adjusts its profit-maximizing level of output in response to changes in input prices.  

Return here when you have finished.

Need help downloading the Excel file?

 

In Question 7 you saw that as the cost of fixed inputs increases from $722.50 to $922.50, the average total cost curve shifts upward (by how much?) but the marginal cost curve did not shift. Hence, the firm's supply curve does not shift when the cost of fixed inputs changes. Why?

In Tutorial 8 we discovered that marginal cost, MC(Q), is the derivative of either the total cost, or variable cost, functions. [The reason why the derivative of TC(Q) results in the same equation as the derivative of VC(Q) is found in the answers posted on Webboard under the Production conference.] So changes in fixed costs do not affect marginal cost and, hence, do not affect the firm's supply curve.

In Question 8 you saw that as the cost of variable inputs increases from $40 per unit to $50 per unit, the average total cost curve and the marginal cost curve shifts upward. (Do you know how much each curve shifts? You should... Review your answers to Tut. 8 Questions 9-10 in the CostMin.xls worksheet where you solved this type of problem mathemagically.) Hence, the firm's supply curve shifts only when the per unit cost of variable inputs changes.

Note the difference in the way we describe that shift. We refer to an increase in MC as an upward shift, and to a decrease in MC as a downward shift. Using this model it is incorrect to talk about rightward and leftward shifts of the curves. This difference is important for you to remember. Because the cost of any unit of output, Q, is changing, it is with respect to that output that we describe what happens to costs. So for an output of 150 units per time period, an increase in the cost of variable inputs causes the firm's supply to decrease and MC shifts upward. A decrease in the cost of variable inputs causes the firm's supply to increase and MC shifts downward.

 

Once again, you should now review, for the last time - I promise, GFE 19.

This completes our analysis of how to model the behavior of a profit-maximizing firm with no market power in the short run. In the next part of the Tutorial we look at modeling the behavior of the firm, and the market, in the long run.