L18

1
L18

• Supply function,
• Entry and market structure

2
Road map

• 1) Consumers choice
• 2) Equilibrium, Producers
• (Pareto efficiency)
• 3) Market Failures
• - supply, free entry, market structure (IO)
• - monopoly and oligopoly (IO)
• - externalities
• - public goods
• - asymmetric information

3
Producers

• Producers
• Maximize profit
• cost minimization (engineers)
• (IRS, CRS, DRS)
• level of production (managers) today

4
Today

• Technology for free? Typically fixed costs F
• F does not depend on the level of y
• Optimal supply y
• Partial equilibrium model (one industry)
• Equilibrium price given N firms
• Free entry number of firms

5
Cost Curves

• We add Fixed Cost F (does not depend on y)
• Total cost Fixed Cost Variable Cost
• Average costs ATC, AFC, AVC
• Marginal cost MC

6
Example Total Cost
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7
Example Average Cost
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8
Average and Marginal Cost

• Does MC always cut ATC at the minimal point?
• Minimal Efficient Scale (MES)
• Find MES given

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9
Profit Maximizing y (price takers)

• What is the optimal level of y given p, F
• Secret of happiness (FOC)
• Non-negative profit

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10
Individual supply and profit
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