lecture_7 - Industry supply in competitive markets The...

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ECOS2001 1 Industry supply in competitive markets The Short run In a short-run the number of firms in the industry is, temporarily, fixed. Let n be the number of firms; i = 1, … ,n. S i (p) is firm i’s supply function. The industry’s short-run supply function is 1 () . n i i Sp S p = =
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ECOS2001 2
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ECOS2001 3 In a short-run, neither entry nor exit can occur. Consequently, in a short-run equilibrium, some firms may earn positive economics profits, others may suffer economic losses, and still others may earn zero economic profit.
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ECOS2001 4 Long-run industry equilibrium No fixed factors of production for firms In the long run entry and exit is possible - industry’s long-run supply function must account for entry and exit as well as for the supply choices of firms that choose to be in the industry Positive economic profit induces entry. Economic profit is positive when the market price p s e is higher than a firm’s minimum av. total cost; p s e > min AC(y). Entry increases industry supply, causing pse to fall. When does entry cease?
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ECOS2001 5
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ECOS2001 6 The long-run number of firms in the industry is the largest number for which the market price is at least as large as min AC(y). Now we can construct the industry’s long-run supply curve.
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ECOS2001 7
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ECOS2001 8 Long-Run Industry Supply AC(y) MC(y) y A “Typical” Firm The Market Long-Run Supply Curve pp Y y 3 *
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ECOS2001 9 Long-Run Industry Supply AC(y) MC(y) y A “Typical” Firm The Market Long-Run Supply Curve pp Y y* In the limit, as firms become infinitesimally small, the industry’s long-run supply curve is horizontal at min AC(y).
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This note was uploaded on 04/20/2010 for the course ECOS 2001 taught by Professor None during the One '09 term at University of Sydney.

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lecture_7 - Industry supply in competitive markets The...

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