econ lecture 13.docx

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Economics for Management Studies
Michael Krashinsky

Supply and demand determines the price of goods Supply curve for the firm: P= Marginal Cost when quantity is above minimum Average Variable Cost How do we get the supply curve for the industry? We assume the firms all have the same supply curve One over the number of firms shows how much of the industry output is supplied by each firm. For example if there are 50 firms, each firm contributes 2% to the overall output. In this case the value 0.02 is the coefficient of Q(the quantity supplied by the industry as a whole). We sub 0.02Q into the supply curve for the firm to get the supply curve for the industry. Often the number of firms, the supply curve for the firm and the demand curve is given. First find the supply curve for the industry and then make the supply and demand curves equate to find the equilibrium quantity. Note: this quantity(total output) divided by the number of firms is the amount each firm produces. Once the equilibrium quantity is found sub into either the demand or the supply curve to find the equilibrium price. Total revenue for the firm is the price multiplied by the quantity produced by the firm. A cost function should also be given if required to find the firm’s cost as well. Subtract the cost from the revenue to find the profit for the firm. Remember, if profits are negative make sure you have done the question correctly and that the profit > or = fixed costs. As the number of firms shrinks, less is being supplied which raises the price. The supply curve shifts to the right at the number of firms increases. Even though with a large number of firms, more output is produced, there is less output produced by each firm as the number of firms grows.
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