Lecture 10 Producer Supply Theory

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Lecture 10 - Producer Supply Theory

• Wissinks Words

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remarks

• Switching gears Theory of the Firm
• Embarking on an analysis of the firm.
• Note
• There are lots of different types of firms.
• There are lots of ways to organize
  entrepreneurial activity.
• There are lots of firm objectives.

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what we assume!

• For our analysis we assume that
• we have an owner manager,
• who has a company,
• with the primary and only objective to maximize
  profit,
• in a perfectly competitive market.
• (we will eventually relax the assumption that we
  are in a perfectly competitive market
  environment)

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profit maximization

• profit total revenue - total cost
• total revenue
• determined by the level and nature of competition
  in your market
• under conditions of perfect competition the firm
  is a price taker
• total cost
• costs are determined by factor market prices and
  the firms technology

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cost structures

• There are lots of ways to describe costs.
• You need to understand them all.
• For example
• total, fixed and variable costs
• average and marginal costs
• long run and short run costs
• all related to each other

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cautions

• Will go quickly from costs to the firms supply
  curve to market supply.
• Later on you will see how supply was determined
  from the firms fundamental profit maximization
  exercise.
• Keep these goals in mind.
• Look for the links as they are forged.

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questions to keep in mind

• Why is the firms supply curve the firms
  marginal cost curve?
• Why does profit maximization occur where Pmc for
  perfectly competitive firms?
• What do I need to know and understand about these
  relationships?
• How will these relationships be affected by
  changes in my assumptions about the market
  structure?