Step Three Supply Curve

Next we examine the relationship between selling price of oil and the amount of oil the company is willing to extract. 

Comprehension

1)      In a competitive market, what happens if one oil producer sets its price higher than the market price?

2)      What happens if a producer sets the price too low to cover cost?

3)      Will a higher selling price always bring more profit?  Explain.

 Acquisition

The amount of a good or service that producers plan to sell at a given price during a given period is called the quantity supplied.  For details and examples, see the menu topic.

Assumptions  

For a given price, the producers will supply the amount which yields maximum profit. 

The cost function from Step One is valid.

Questions

1)      Write a revenue function describing the revenue for selling q barrels if the selling price is fixed at $p per barrel.  What is the marginal revenue?

2)      For each selling price p, determine the number of barrels q which yield maximum profit.  In order to do this, use the fact that profit is maximum when marginal revenue = marginal cost.  This equation defines the selling price p in terms of the number of barrels q.  This is the supply function.

3)      Use the supply function from question #2 to answer these questions.

a)      What is the smallest selling price that the producer needs to sell any amount of oil at a profit?

b)      How much does the producer plan to sell if the price reaches $16.50 per barrel?

c)      What price does the producer require to sell 2000 barrels?

Reflection

Examine solutions and implications

1)      According to your supply curve, what happens to the quantity the producer will supply if the price increases?

2)      According to your supply curve, what happens to the price the producer requires if the producer wishes to sell more oil?

3)      You have seen (in Step Two) that increasing the selling price increases the profit.  What restraints are on the producer that keep the selling price from increasing without limit?