Economics of the Firm

A supply curve for natural gas, for instance, is determined by analyzing each field to determine production costs. The cost is low for a large shallow field near a city. The cost is high for a small deep field in the Arctic. As the price increases, more fields of higher production costs are opened. A detailed example illustrating the development of a supply curve for a simple chemical processing unit is given later, in Example 2.2. 

Human need is infinite and can never be completely satisfied by the finite productive capacity of any economy. A free market is efficient in regulating supply and demand, so what is produced just meets what is demanded with hard dollars. Since the market allocates a limited resource to those who can pay the price, some needs will not be satisfied. The free market differs from a centrally planned economy, where the government allocates a limited resource not according to individual purchasing power but according to overall political goals. Neither the free market nor the centrally planned economy can satisfy all needs. 

Marginal producers who will either curtail production or go out of business when the price drops 

Marginal consumers who will reduce consumption or do without entirely when the price rises 

The time necessary to complete supply or demand shifts depends on the product and the industry. In a technologically simple industry, readjustments toward equilibrium may take place over a few months. In complex and capital-intensive industries like the CPI, in which the planning, design, and construction of a plant take several years, changes leading to equilibrium may likewise take several years. In the short run, both supply and demand tend to be inelastic, since 

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When a product is in demand, numerous firms attempt to produce it at a profit. What processing unit should be built to produce the product and how the unit should be operated to make a profit are important aspects of a subject known as the economics of the firm. Section 2.2 discusses portions of this important subject relevant to the CPI. 

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