(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 318

CHAPTER • Profit Maximization and Competitive Supply 293 Price (dollars per unit) MC F IGURE 8.6 P2 AC AVC P1 THE SHORT-RUN SUPPLY CURVE FOR A COMPETITIVE FIRM In the short run, the firm chooses its output so that marginal cost MC is equal to price as long as the firm covers its average variable cost The short-run supply curve is given by the crosshatched portion of the marginal cost curve P = AVC q1 q2 Output The higher price not only makes the additional production profitable, but also increases the firm’s total profit because it applies to all units that the firm produces The Firm’s Response to an Input Price Change When the price of its product changes, the firm changes its output level to ensure that marginal cost of production remains equal to price Often, however, the product price changes at the same time that the prices of inputs change In this section we show how the firm’s output decision changes in response to a change in the price of one of its inputs Figure 8.7 shows a firm’s marginal cost curve that is initially given by MC1 when the firm faces a price of $5 for its product The firm maximizes profit by producing Price, cost (dollars per unit) In §6.2, we explain that diminishing marginal returns occurs when each additional increase in an input results in a smaller and smaller increase in output MC MC F IGURE 8.7 THE RESPONSE OF A FIRM TO A CHANGE IN INPUT PRICE $5 When the marginal cost of production for a firm increases (from MC1 to MC2), the level of output that maximizes profit falls (from q1 to q2) q2 q1 Output