ECON20002 Lecture Notes - Lecture 16: Opportunity Cost, Market Power, Production Function
27 Jul 2018
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Loss-making firm continues production if : =() is the short-run shutdown point. Shutting down only when will minimise losses. Firm"s supply curve is portion of mc curve for which > () is supply curve for individual firm. If there are n identical firms in the market the market supply is ()=() Firm"s aren"t identical market supply will have kinks. Firm"s objective is the same; to maximise the following profit function: ()=()=() Firms only choose q that leads to non-negative profits () () 0. To show relationship use q = f(l, k) and c(q) = wl + rk to rewrite profits as: Cost minimising choice of l and k satisfies the following conditions: Firms choose l and k to maximise profits: Evaluating the expressions and dividing them gives the tangency condition for cost minimisation: Since the profit maximising choice satisfies the tangency condition, and is on the production function, profit maximisation implies cost minimisation.
