How to read this
The red curve is marginal cost , the black one average cost . At price the firm produces where on the rising part of , but only if . So the orange curve is the supply curve .
- Move across the shutdown price : output jumps from zero to .
- Choose Homogeneous of degree k and set : profit has no maximum. Increasing returns and price taking do not mix.
- With any homogeneous technology, at every output.
Returns to scale
Output price
Input prices and technology — only shift the curves up or down
These only change in : all cost curves are stretched vertically by the same factor. The shape of the curves comes from returns to scale.
Plot range
Marginal and average cost
, , supply curve , price ; the green rectangle is the profit .
Revenue and cost
revenue and cost ; the arrow is the largest gap, the profit.
Profit
against the outside option 0 (producing nothing).
Key numbers
With a homogeneous technology the ratio is the same at every : means , means (lecture 3).