Download The Industry Supply Curve

The Industry Supply
Curve
Industry Supply Curve
• Industry Supply Curve is the relationship
between price and the total output of
an industry as a whole
• Up to this point, was called the supply
curve or the market supply curve
Short-Run Industry Supply Curve
• Jennifer and Jason’s farm is
producing organic tomatoes and
assume there are 100 organic
tomatoes farms and they all have
the same costs as Jennifer and Jason
The Short-Run Market Equilibrium
Price, cost
of bushel
All 100 farms has the same individual
Short-run industry
short-run
supply curve.
$26
supply curve, S
At the price below $10, no farms will
22
produce.
E
Market
price
18
MKT
D
14
Shut-down
price
10
At a price of more than $10, each farm will
produce the quantity of output at which its
marginal cost is equal to the market price.
200
300
400
700
Each farm0 will produce
4 bushels
if500the 600
price is $14, at 5 bushels the priceQuantity
is…..6
of tomatoes (bushels)
bushels……
Short-Run Industry Supply Curve
• All leads to the short-run industry
supply curve
• This curve shows how the
quantitative supplied by an industry
depends on the market price given
by a fixed number of producers
Short-Run Industry Supply Curve
• EMKT is the short-run market equilibrium
where the
quantity supplied
equals the
Quantity
demanded, taking
the number of producers as given
Long-Run Industry Supply Curve
• New producers will enter the industry
whenever existing producers are making
a profit – whenever the market price is
above the break-=even price of $14 a
bushel
• If the new firms enter the industry, the
quantity supplied at any given price will
increase
Long-Run Industry Supply Curve
• The EMKT had a equilibrium market price of $18
and a quantity of 500 bushels. At this price, existing
producers are profitable
• The existing firm makes a total
Profit shown by the A rectangle
when the market price is $18
• These profits will induce new
producers to enter the industry,
shifting the short-run industry supply curve to the
right
Long-Run Industry Supply Curve
• The effect of the new producers on the
existing farm is a fall in price causes it to
reduce its output and its profits fall to the
rectangle B
• The profit of the existing firms is diminishing
to DMKT but this also means that the
numbers of firms will continue to rise
Long-Run Industry Supply Curve
• EMKT and DMKT and CMKT is a short-run
equilibrium
• Since the price of $14 is each firm’s break-even
price, an existing producer makes zero profit,
earning only opportunity cost of the resource
used in production
• CMKT = long-run market equilibrium which is
when the quantity supplied equals the quantity
demanded, given that sufficient time has
elapsed for entry into and exit from the industry
to occur
Long-Run Industry Supply Curve
• In the long-run market equilibrium, all
existing and potential producer have
fully adjusted to their optimal long-run
choices, as a result, no producer has an
incentive to either enter or exit the
industry
The Effect of an Increase in Demand in the
Short Run and the Long Run
Price,
cost
(a) Existing Firm
Response to Increase in
Demand
An increase
in demand
raises price
and profit.
$18
14
0
Price
MC
Y
ATC
Y
MKT
X
MKT
X
Quantity
(b) Short-Run and
(a) Existing Firm
Long-Run Market
Response to New
Response to Increase
Entrants
Price,
in Demand
cost
Long-run
Higher industry
industry supply
output from new
entrants drive
curve,
LRS
S
S
price and profit
1
2
back down.
0
QXQY
Increase in
output from
new entrants
Y
ATC
Z
D
Z
MKT 2
D
1
QZ Quantity
MC
0
Quantity
Long-Run Industry Supply Curve
• The LRS line that passes through XMKT and
ZMKT is the long-run industry supply curve
– Shows how the quantity supplied by an industry
responds to the price given that producers have
had time to enter or exit the industry
• In the example, the long-run industry supply
curve is horizontal at $14 – what does this
say about its elasticity?
Long-Run Industry Supply Curve
• Perfectly elastic!
• In the example, the industry supply is
perfectly elastic in the long run
• Perfectly elastic long-run supply is
actually an assumption for many
industries—it shows constant costs
across the industry
– Each firm (regardless of it being an
incumbent or a new entrant) faces the
same cost structure
Long-Run Industry Supply Curve
• Example of these industries: agriculture or
bakeries
– Use some product that is in limited supply
(inelastically supplied)
• When industry expands…..price of that input
is driven up
• Consequently, later entrants in the industry
find that they have a higher cost structure
than early entrants
– Example: beachfront resort hotels
Long-Run Industry Supply Curve
• Regardless of if long-run industry supply
curve is horizontal or upward sloping or
even downward sloping, the long-run
price elasticity of supply is HIGHER than
the short-run elasticity whenever there
is free entry and exit
Long-Run Industry Supply Curve
• Long-run industry supply curve is always
flatter than the short-run industry supply
curve
• WHY????
• The reason is entry and exit – a high price
caused by an increase in demand attracts
entry by new producers, resulting in a rise in
industry output and an eventual fall in price
The Cost of Production &
Efficiency in Long-Run Equilibrium
• Three conclusions about cost of production
and efficiency in the long-run equilibrium of
a perfectly competitive industry:
1. in a perfectly competitive industry in
equilibrium, value of marginal cost is the
same for all firms
– WHY?
– All firms produce the quantity of output at
which MC equals the market price and as pricetakers, all face the same market price
The Cost of Production &
Efficiency in Long-Run Equilibrium
2. In a perfectly competitive industry with
free entry and exit, each firm will have
zero economic profit in long-run
equilibrium
– Firms produce the quantity of output that
minimizes its ATC
– TC of production of the industry’s output
is minimized in a perfectly competitive
industry
The Cost of Production &
Efficiency in Long-Run Equilibrium
3. Long-run market equilibrium of a
perfectly competitive industry is
efficient: no mutually beneficial
transactions go unexploited
– WHY?
– All consumers have a willingness to pay
greater than or equal to sellers’ cost
actually get the good
The Cost of Production &
Efficiency in Long-Run Equilibrium
• In the long-run equilibrium of a perfectly
competitive industry, production is efficient:
costs are minimized and no resources are
wasted
• Allocation of goods to consumers is efficient:
every consumer willing to pay the cost of
producing a unit of the good gets it
The Industry Supply
Curve Notes
Industry Supply Curve
• Industry Supply Curve is
• Up to this point, was called the supply
curve or the market supply curve
The Short-Run Market Equilibrium
Price, cost
of bushel
Short-run industry
supply curve, S
$26
22
Market
price
E
MKT
18
D
14
Shut-down
price
10
0
200
300
400
500
600
700
Quantity of tomatoes (bushels)
Short-Run Industry Supply Curve
• All leads to the short-run industry
supply curve
• This curve shows how the
Short-Run Industry Supply Curve
• EMKT is the short-run market equilibrium
where the
Long-Run Industry Supply Curve
• New producers will enter the industry
whenever existing producers are making
a profit – whenever the market price is
above the break-=even price of $14 a
bushel
• If the new firms enter the industry, the
quantity supplied at any given price will
increase
Long-Run Industry Supply Curve
• The EMKT had a equilibrium market price of $18
and a quantity of 500 bushels. At this price, existing
producers are profitable
• The existing firm makes a total
Profit shown by the A rectangle
when the market price is $18
• These profits will induce new
producers to enter the industry,
shifting the short-run industry supply curve to the
right
Long-Run Industry Supply Curve
• The effect of the new producers on the
existing farm is a fall in price causes it to
reduce its output and its profits fall to the
rectangle B
• The profit of the existing firms is diminishing
to DMKT but this also means that the
numbers of firms will continue to rise
Long-Run Industry Supply Curve
• EMKT and DMKT and CMKT is a short-run
equilibrium
• Since the price of $14 is each firm’s break-even
price, an existing producer makes zero profit,
• CMKT = long-run market equilibrium which is
when the quantity supplied equals the quantity
demanded, given that sufficient time has
elapsed for entry into and exit from the industry
to occur
Long-Run Industry Supply Curve
• In the long-run market equilibrium,
The Effect of an Increase in Demand in the
Short Run and the Long Run
Price,
cost
(a) Existing Firm
Response to Increase in
Demand
Price
(b) Short-Run and
Long-Run Market
Response to Increase
in Demand
S
1
MC
$18
14
0
Y
ATC
Y
MKT
X
MKT
X
Quantity
0
QXQY
(a) Existing Firm
Response to New
Entrants
Price,
cost
LRS S
2
MC
Y
Z
D
Z
MKT 2
D
1
QZ Quantity
ATC
0
Quantity
Long-Run Industry Supply Curve
• The LRS line that passes through XMKT and
ZMKT is the long-run industry supply curve
• In the example, the long-run industry supply
curve is horizontal at $14 – what does this
say about its elasticity?
Long-Run Industry Supply Curve
• __________________!
• In the example, the industry supply is
perfectly elastic in the long run
• Perfectly elastic long-run supply is
actually an assumption for many
industries—it shows constant costs
across the industry
Long-Run Industry Supply Curve
• Example of these industries: agriculture or
bakeries
• When industry expands…..price of that input
is driven up
• Consequently, later entrants in the industry
find that they have a higher cost structure
than early entrants
Long-Run Industry Supply Curve
• Regardless of if long-run industry supply
curve is horizontal or upward sloping or
even downward sloping, the long-run
price elasticity of supply is HIGHER than
the short-run elasticity whenever there
is free entry and exit
Long-Run Industry Supply Curve
• Long-run industry supply curve is always
flatter than the short-run industry supply
curve
• WHY????
• The reason is entry and exit –
The Cost of Production &
Efficiency in Long-Run Equilibrium
• Three conclusions about cost of production
and efficiency in the long-run equilibrium of
a perfectly competitive industry:
1. in a perfectly competitive industry in
equilibrium, value of marginal cost is the
same for all firms
The Cost of Production &
Efficiency in Long-Run Equilibrium
2. In a perfectly competitive industry with free
entry and exit, each firm will have zero
economic profit in long-run equilibrium
The Cost of Production &
Efficiency in Long-Run Equilibrium
3. Long-run market equilibrium of a perfectly
competitive industry is efficient: no
mutually beneficial transactions go
unexploited
The Cost of Production &
Efficiency in Long-Run Equilibrium
• In the long-run equilibrium of a perfectly
competitive industry, production is efficient:
• Allocation of goods to consumers is efficient:
every consumer willing to pay the cost of
producing a unit of the good gets it