PAM200Lecture14 - PAM 200 Lecture 14 Agenda Long-Run Supply...

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    PAM 200 Lecture 14 Agenda Long-Run Supply Curve Shapes Zero Economic Profit in the Long-Run Consumer Surplus Shifts in Curves and CS Producer Surplus
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    Long-run Market supply  curve Assume: Free entry and exit There is an unlimited number of firms All firms have identical costs Input prices are constant
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    Long-run Market supply  curve Then, the long-run market supply curve  will be  flat at the minimum of the LRAC   Reasoning: If the price is a tiny bit  greater than the minimum of the LRAC  curve, then firms will enter More firms increases n, expand output  until economic profits are driven to zero
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      Long-run Market supply  curve (con’t) Price will not be below minimum of the  LRAC curve because firms will shut  down  Those are strong assumptions 
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    Long-run Market supply  curve: Upward sloping Long-run supply  may slope upward  for  several reasons: Number of firms may be limited : EX:  Government regulations restrict entry, so the  number of firms in the market will be limited  If the number of firms is limited, it is only  possible to expand output if the existing firms  expand their output, which means climbing up  the LRMC curve
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    Long-run Market supply  curve: Upward sloping Inputs may become scarce as output  increases : Even if firms have identical costs  and free entry, if some input becomes scarcer  as output expands (e.g. land becomes  scarcer, specific human capital (steelworkers  with no fear of heights), etc.) so the price of  some input gets bid upward  Particularly true if that industry buys a large  fraction of the total input supply
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    Long-run Market supply  curve: Upward sloping Firms may have different costs : If firms  have different costs, and  there are a limited  number of low cost firms , then market  supply will be upward sloping since higher- cost firms will enter as the price rises Note: It is unusual for all inputs to be in  infinite supply, so supply is likely to slope up
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    Long-run Market supply  curve: Downward sloping Market supply may also slope downward
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This note was uploaded on 03/03/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell University (Engineering School).

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PAM200Lecture14 - PAM 200 Lecture 14 Agenda Long-Run Supply...

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