May 12, 2004
Theory of the Firm
The foundation of Theory of the Firm is determing the shape of the average cost and marginal cost curves.
The first case we considered was a natural monopolist with a downward sloping average cost curve facing a downward sloping demand curve. From the demand curve, we derived the marginal revenue curve.
The marginal cost curve can be derived from the average cost curve. (Do any of these numbers look familiar?)
The most important case is a firm with a U-shaped average cost facing a horizontal demand curve. Changing the market price changes the quantity supplied. The marginal cost curve becomes the firm's supply curve.
Posted by bparke at 09:55 PM