Introduction

The previous chapter examined a firm's production function and its cost curves. This chapter asks a different question: how much does a firm actually choose to produce? The answer rests on a strong -- and admittedly unrealistic -- assumption: that a firm is a ruthless profit maximiser, producing and selling exactly the quantity that maximises its profit. This chapter also assumes a firm always sells everything it produces, so 'output' and 'quantity sold' can be used interchangeably.

The chapter proceeds in three stages. It first sets up and works through the firm's profit-maximisation problem in detail. It then derives the firm's supply curve -- the quantity the firm chooses to produce at each possible market price. Finally, it shows how to add up the supply curves of individual firms to obtain the market supply curve for the industry as a whole.