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Where Do Supply Curves Come From?

Where Do Supply Curves Come From?. What IS a Supply Curve?. What is the MATHEMATICAL FORMULA for LINEAR Supply?. P = b+aQ. Where Do Supply Curves Come From?. Supply Curves are MC curves ABOVE the minimum AVC!. Short-run Individual firm supply curve. Why not here??.

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Where Do Supply Curves Come From?

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  1. Where Do Supply Curves Come From?

  2. What IS a Supply Curve? What is the MATHEMATICAL FORMULA for LINEAR Supply? P = b+aQ

  3. Where Do Supply Curves Come From? Supply Curves are MC curves ABOVE the minimum AVC! Short-run Individual firm supply curve Why not here?? What if price is here? Economic loss! Shutdown! P<AVC Test yourself: Does the supply curve have anything to do with fixed costs?

  4. What is the optimal input combination GIVEN cost or quantity? “No matter what the structure of industry may be… (for profit or not for profit) … the objective of most producers is to produce any given level and quality of output at the lowest possible cost. Equivalently, the producer wants to produce as much output as possible from a given expenditure on inputs.” (Frank p. 233) Duality w = cost of labor Maximize Q given C Minimize C given Q r = cost of capital Marginal products per dollar

  5. Short Run vs Long RunCosts Key: long run total costs are those associated with the optimal inputs for a given quantity Short run cost curves Long run cost curves No fixed or variable costs in the long run! Inflection point Total costs can be zero in the long run Tangency point The change in total costs reflects a change in optimal inputs to reach a new quantity isoquant What happens when we combine the short and long run curves…

  6. The long-run average cost curve is the envelopeof the short run curves. Why doesn’t the LAC curve intersect with the minimum points of the short run cost curves? “…it is the occasional errors of geniuses like Viner…which seminally advance the body of science.” Paul Samuelson (1972) JPE 72:5 – 11. Jacob Viner

  7. Why doesn’t the LAC curve intersect with the minimum points of the short run cost curves? When the short run cost curve is tangent to the long run curve the average cost has the same slope And the marginal cost curves must have the same slope The minimum point on the short run curve will be where the slope of the average equals the marginal This will be everywhere above the long run cost curve except where the long and short run curves are tangent at the long run minimum. Silbergerg on the Envelop Theorem http://www.ems.bbk.ac.uk/faculty/phdStudents/kim/me_env.pdf Eugene Silberberg

  8. Short run cost curves Capital is fixed At high Q too much labor At low Q too much capital This mix of labor & capital is optimal to make Q2 Long run cost curves: everything is variable

  9. Organizations produce where marginal cost = marginal benefit on the rising part of the marginal cost curve!

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