Cost Minimization and Firm Supply: Key Concepts in Economic Theory
This chapter explores the fundamentals of cost minimization models, focusing on the balance between isocost lines and isoquants. It covers important concepts such as marginal cost (MC), average variable cost (AVC), and the relationships between fixed and variable costs. Additionally, the chapter delves into the supply decisions of firms within a competitive market, emphasizing the upward slope of the supply curve and the importance of producer surplus. Key topics include short-run and long-run average costs, marginal cost behavior, and the implications of sunk costs in economic decision-making.
Cost Minimization and Firm Supply: Key Concepts in Economic Theory
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Presentation Transcript
Chapter 20 Cost Minimization
Basic model: • minx1, x2 w1 x1 + w2 x2 subject to f (x1 , x2 ) = y gives c (w1 , w2 , y )
Isocost lines: p351 x2 = C/w2 – w1x1/w2.
Tangency of an isocost line and an isoquant. – MP1 (x1, x2) / MP2 (x1, x2 ) = TRS(x1, x2 ) = – w 1 / w 2
x2 . Optimal choice Isocost lines slope= – w 1 / w 2 x2* Isoquant f (x1 , x2 ) = y x1* x1
Minimizing costs for y = min{ax1 , bx2};完全互补 y = ax1 + bx2; 完全替代 and y = x1a x2b. Cobb-Douglas
Fixed and variable costs. (FC and VC) Total, average, marginal, and average variable costs. (TC, AC, MC and AVC)
MC > (<) AC if and only if AC is increasing (decreasing) MC cuts AC (AVC) at AC’s (AVC’s) extreme.
AC MC AC AVC MC . AVC . y
Chapter 21 Cost Curves
The area under MC gives VC: ∫MC = VC
MC MC Variable costs y
Example: c (y) = y 2 + 1.
MC AC MC AVC AC AVC . 2 1 y The cost curves for c (y) = y 2 + 1
AC SAC=C(y1, k*)/y . LAC=C(y)/y y y* Short-run and long-run average costs
Short-run average cost curves AC Long-run average cost curves y* y Short-run and long-run average costs
Sunk costs are costs that are not recoverable. A special kind of fixed costs.
Chapter 22 Firm Supply
Pure competition. Price Taker..
The demand curve facing a competitive firm. p380 Market demand P Demand curve facing firm Market price P* Q
The supply decision: FOC: MC ( y* ) = p. SOC: MC ’ ( y* ) ≥ 0.
The firm’s supply curve is the upward-sloping part of MC that lies above the AVC curve. The part of MC is also seen as the inverse supply function.
AC MC AC AVC MC AVC firm’s supply curve P y y1 y2
Three equivalent ways to measure the producer’s surplus ( = R – VC =π + FC ).p389
P389 Example: c ( y ) = y 2 + 1.
LR: p = MC ( y, k ( y ) ) vs SR: p = MC ( y, k )
Chapter 23 Industry Supply
Horizontal summation gives the industry supply.
P S1 S2 S1 + S2 Y
Rent seeking. Economists versus lobbyists
