Download short-run industry supply curve

Microeconomics in Modules
and
Economics in Modules
Third Edition
Krugman/Wells
Module 27
Long-Run Outcomes
in Perfect Competition
What You Will Learn
1
Why industries behave differently in the
short run from the long run
2
What determines the industry supply curve in
both the short run and the long run
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The Short-Run Individual
Supply Curve
The short-run individual supply
curve shows how an individual
producer’s optimal output quantity
depends on the market price, taking
fixed cost as given.
Price, cost
of bushel
Short-run individual
supply curve
MC
Shutdown
price
$18
16
14
12
10
0
ATC
E
AVC
B
C
A
1
2
3 3.5 4
Minimum average
variable cost
5
6
A firm will cease
production in the
short run if the
market price falls
below the shutdown price, which
is equal to
minimum average
variable cost.
7
Quantity of tomatoes (bushels)
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Industry Supply Curve
• The industry supply curve shows the relationship
between the price of a good and the total output of the
industry as a whole.
• The short-run industry supply curve shows how the
quantity supplied by an industry depends on the
market price, given a fixed number of producers.
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Industry Supply Curve
• There is a short-run market equilibrium when the
quantity supplied equals the quantity demanded,
taking the number of producers as given.
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The Short-Run Market Equilibrium
The short-run industry supply curve
shows how the quantity supplied by an
industry depends on the market price
given a fixed number of producers.
Price, cost
of bushel
Short-run industry
supply curve, S
$26
22
EMKT
Market 18
price
D
14
Shut- 10
down
price
0
200
300
400
500
600
There is a short-run
market equilibrium
when the quantity
supplied equals the
quantity demanded,
taking the number of
producers as given.
700
Quantity of tomatoes (bushels)
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The Long-Run Industry Supply Curve
• A market is in long-run market equilibrium
when the quantity supplied equals the quantity
demanded, given that sufficient time has
elapsed for entry into and exit from the
industry to occur.
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The Long-Run Market Equilibrium
(b) Individual Firm
(a) Market
Price, cost
of bushel
S1
S2
S3
Price, cost
of bushel
$18
EMKT
$18
MC
E
A
16
DMKT
16
ATC
D
B
14.40
CMKT
14
D
0
500
Break- 14
even
price
750
1,000
Quantity of tomatoes (bushels)
C
0
3
Y
Z
4 4.5 5
6
Quantity of tomatoes (bushels)
A market is in long-run market equilibrium when the quantity supplied equals the quantity
demanded, given that sufficient time has elapsed for entry into and exit from the industry.
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The Effect of an Increase in Demand
in the Short Run and the Long Run
(a) Existing Firm Response to
Increase in Demand
Price,
cost
Price,
cost
Price
An increase in
demand raises
price and profit.
$18
14
(b) Short-Run and Long-Run
Market Response to
Increase in Demand
Y
S1
MC
ATC
X
(c) Existing Firm Response to
New Entrants
Higher industry output from
new entrants drives price and
profit back down.
LRS S
2
MC
Y
YMKT
ZMKT D2
XMKT
ATC
Z
D1
0
Quantity 0
The LRS shows how the quantity
supplied responds to the price
once producers have had time to
enter or exit the industry.
QX QY
QZ Quantity 0
Quantity
Increase in
output from
new entrants.
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Comparing the Short-Run and
Long-Run Industry Supply Curves
Price
Short-run industry supply
curve, S
AA fall
in price
to
higher
priceinduces
attractsproducers
new entrants
exit
in the
generating
a fall
in the
longlong
run,run,
resulting
in a rise
in
in
industry
output
and
a riseprice.
in price.
industry
output
and
lower
Long-run
industry supply
curve, LRS
The long-run industry supply
curve is always flatter—more
elastic—than the short-run
industry supply curve.
Quantity
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The Cost of Production and Efficiency
in the Long-Run Equilibrium
• In a perfectly competitive industry in
equilibrium, the value of marginal cost is the
same for all firms.
• In a perfectly competitive industry with free
entry and exit, each firm will have zero
economic profits in long-run equilibrium.
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The Cost of Production and Efficiency
in the Long-Run Equilibrium
• The long-run market equilibrium of a perfectly
competitive industry is efficient: no mutually
beneficial transactions go unexploited.
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Economics in Action
Baling In, Bailing Out
• Cotton prices were soaring between early 2010 and
early 2011, and farmers began planting more cotton.
• Increases in demand and decreases in supply caused
the price increases.
• Will cotton production remain highly profitable? No,
because a highly profitable industry will draw new
producers, bringing prices down.
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Summary
1. The industry supply curve depends on time.
2. The short-run industry supply curve is the industry
supply curve given that the number of firms is fixed.
3. The short-run market equilibrium is given by the
intersection of the short-run industry supply curve and the
demand curve.
4. The long-run industry supply curve is the industry
supply curve given sufficient time for entry and exit.
5. In long-run market equilibrium—the intersection of the
long-run industry supply curve and the demand curve—
no producer has an incentive to enter or exit.
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Summary
6. The long-run industry supply curve is often horizontal. It may
slope upward if there is limited supply of an input. It is always
more elastic than the short-run industry supply curve.
7. In the long-run market equilibrium of a competitive industry,
profit maximization leads each firm to produce at the same
marginal cost, which is equal to market price.
8. Free entry and exit means that each firm earns zero economic
profit—producing the output corresponding to its minimum
average total cost. So the total cost of production of an industry’s
output is minimized.
9. The outcome is efficient because every consumer who is willing
to pay at least marginal cost gets the good.
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