Ch. 9 Sec. 3

# Ch. 9 Sec. 3 - chapter 9 Perfect Competition and the >...

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>> Perfect Competition and the Supply Curve Section 3: The Industry Supply Curve chapter 9 Why will an increase in the demand for organic tomatoes lead to a large price increase at first but a much smaller increase in the long run? The answer lies in the behavior of the industry supply curve —the relationship between the price and the total output of an industry as a whole. The industry supply curve is what we referred to in earlier chapters as the supply curve or the market supply curve. But here we take some extra care to distinguish between the individual supply curve of a single firm and the supply curve of the industry as a whole. As you might guess from the previous section, the industry supply curve must be analyzed in somewhat different ways for the short run and the long run. Let’s start with the short run. The Short-Run Industry Supply Curve Recall that in the short run the number of producers in an industry is fixed—there is no entry or exit. We can best understand how the industry supply curve emerges from individual producer supply curves by imagining that all the producers are alike. So let’s The industry supply curve shows the rela- tionship between the price of a good and the total output of the industry as a whole.

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assume that there are 100 organic tomato farms, each with the same costs as Jennifer and Jason’s farm. Each of these 100 farms will have an individual short-run supply curve like the one in Figure 9-4 in “Section 2: Production and Profits.” At a price below \$10, no farms will produce. 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. As you can see from Figure 9-4, this will lead them to produce 4 bushels if the price is \$14 per bushel, 5 bushels if the price is \$18, and so on. So if there are 100 organic tomato farmers and the price of organic tomatoes is \$18 per bushel, the industry as a whole will produce 500 bushels, corre- sponding to 100 farmers × 5 bushels per farmer, and so on. The result is the short-run industry supply curve , shown as S in Figure 9-5. This curve shows the quantity that producers will supply at each price, taking the number of producers as given . The demand curve D in Figure 9-5 crosses the short-run industry supply curve at E MKT , corresponding to a price of \$18 and a quantity of 500 bushels. Point E MKT is a short-run market equilibrium: the quantity supplied equals the quantity demand- ed, taking the number of producers as given. But the long run may look quite differ- ent, because in the long run farms may enter or exit the industry. The Long-Run Industry Supply Curve Suppose that in addition to the 100 farmers currently in the organic tomato business, there are many other potential producers. Suppose also that each of these potential producers would have the same cost curves as existing producers like Jennifer and Jason if it entered the industry When will additional producers enter the industry? Whenever existing producers
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## This note was uploaded on 04/13/2010 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell.

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Ch. 9 Sec. 3 - chapter 9 Perfect Competition and the >...

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