Determination of price and quantity supplied in perfectly competitive market in the short run treating demand as exogenous: Difference between revisions
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| Single firm, deliberately attempting to optimize for profit || Optimal quantity to produce as a function of price, encoded in the short run supply curve || The firm's marginal cost curve ''only''. The market demand curve is not used. || The firm uses its marginal cost curve to determine the optimal quantity to produce as a function of market price. In other words, for any given market price, the firm can use its marginal cost curve to determine the optimal quantity to produce. This choice is encoded in the firm's short run supply curve, which in turn is determined by the firm's marginal cost curve. Although it is not immediately obvious, the firm's short run supply curve coincides geometrically with (part of) the firm's marginal cost curve. || [[Determination of quantity supplied by firm in perfectly competitive market in the short run]] | | Single firm, deliberately attempting to optimize for profit || Optimal quantity to produce as a function of price, encoded in the short run supply curve || The firm's marginal cost curve ''only''. The market demand curve is not used. || The firm uses its marginal cost curve to determine the optimal quantity to produce as a function of market price. In other words, for any given market price, the firm can use its marginal cost curve to determine the optimal quantity to produce. This choice is encoded in the firm's short run supply curve, which in turn is determined by the firm's marginal cost curve. Although it is not immediately obvious, the firm's short run supply curve coincides geometrically with (part of) the firm's marginal cost curve. || [[Determination of quantity supplied by firm in perfectly competitive market in the short run]] | ||
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| Market as a whole, including all firms making micro-adjustments but not necessarily with full information || The market price and quantity traded || The market demand curve (though an individual seller may see only a part thereof) || Firms experiment with raising or lowering prices, and correspondingly raising or lowering the quantity produced (while staying on their individual short run supply curve obtained above) until the market clears. Note that the short run market supply curve used in the analysis of convergence is obtained by adding up all the short run supply curves for individual supply curves obtained at the preceding level. || | | Market as a whole, including all firms making micro-adjustments but not necessarily with full information || The market price and quantity traded || The market demand curve (though an individual seller may see only a part thereof) || Firms experiment with raising or lowering prices, and correspondingly raising or lowering the quantity produced (while staying on their individual short run supply curve obtained above) until the market clears. Note that the short run market supply curve used in the analysis of convergence is obtained by adding up all the short run supply curves for individual supply curves obtained at the preceding level. || [[Convergence towards market price]]. | ||
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In other words, the functional ''relationship'' between price and quantity traded (i.e., the supply curve) is determined through firm's individual optimization decisions, through "local knowledge", independent of other firms and independent of the market demand. The actual value of price and quantity traded are determined through the interaction of buyers and sellers in the market as they gradually adjust values to make the market clear. | In other words, the functional ''relationship'' between price and quantity traded (i.e., the supply curve) is determined through firm's individual optimization decisions, through "local knowledge", independent of other firms and independent of the market demand. The actual value of price and quantity traded are determined through the interaction of buyers and sellers in the market as they gradually adjust values to make the market clear. | ||