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Lecture_19_Industry_Supply

Lecture_19_Industry_Supply - Lecture 19 Industry Supply...

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Lecture 19: Industry Supply c ° 2009 Je/rey A. Miron Outline 1. Introduction 2. Short-Run Industry Supply 3. Industry Equilibrium in the Short Run 4. Industry Equilibrium in the Long Run 5. The Long-Run Supply Curve 6. The Meaning of Zero Pro°ts 1 Introduction We have seen how to derive a °rm±s supply curve from its MC curve. A competitive market will typically have many °rms, however, so industry supply consists of the sum of the individual °rms±supply. We now derive the industry supply curve and the industry equilibrium in com- petitive markets. 2 Short-Run Industry Supply We start by considering the case of a °xed number of °rms, n . Let S i ( p ) be the supply curve of °rm i ; the industry or market supply curve is therefore 1
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S ( p ) = n X i =1 S i ( p ) which is the sum of the individual supply curves. Geometrically, we are just using the sum of the quantities supplied by each °rm in the industry at each price, which is the horizontal sum of individual supply curves: 2
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Graph: Industry Supply Curve as Sum of Individual Supply Curves y = 3 x ° 1 y = 2 x ° 1 y = 1 : 2 x ° 1 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 y p S1(p) S2(p) S(p) 3 Industry Equilibrium in the Short Run To °nd the industry equilbrium, we use the industry supply curve in conjunction with the industry demand curve. Graphically, 3
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Graph: Industry Equilibrium y = 10 ° x y = x ° 1 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 q p q* p* S(p) D(p) This gives an equilibrium price, p ° , and an equilibrium quantity, q ° . We could also write down general or speci°c equations for demand and supply, and solve these algebraically for price and quantity. These solutions, whether using graphs or algebra, do not tell us anything of particular interest by themselves. But, we can use this framework to analyze many important issues. To begin, it is useful to see the implications of the equilibrium for the individual °rms in the industry. We consider three possibilities, depending on the cost curves of the particular °rm. The °rst possibility is one in which a given °rm is making exactly zero pro°ts; it is operating at the point on its MC curve that intersects the minimum of its AC curve: 4
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Graph: A Competitive Firm Earning Zero Pro°ts 0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 q p MC AVC AC p* q* AC (y*) = For this °rm, p = c ( y ) y This implies that revenue equals costs, so this °rm makes zero pro°ts. A second possibility is that the °rm is operating at a point on its MC curve above the minimum of the AC curve: 5
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