Chapter 23 24 25 - Chapter Twenty-Three Industry Supply...

Info iconThis preview shows pages 1–15. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter Twenty-Three Industry Supply
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Supply From A Competitive Industry How are the supply decisions of the many individual firms in a competitive industry to be combined to discover the market supply curve for the entire industry? Since every firm in the industry is a price- taker, total quantity supplied at a given price is the sum of quantities supplied at that price by the individual firms.
Background image of page 2
Short-Run Supply 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 S p S p i i n ( ) ( ). = = 1
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Supply in Competitive Industry p S 1 (p) p S 2 (p) p p’ p’ S 1 (p’) S 1 (p’) Firm 1’s Supply Firm 2’s Supply S(p) = S 1 (p) + S 2 (p) Industry’s Supply
Background image of page 4
Supply in Competitive Industry p S 1 (p) p S 2 (p) p S(p) = S 1 (p) + S 2 (p) p” p” S 1 (p”) S 1 (p”)+S 2 (p”) S 2 (p”) Firm 1’s Supply Firm 2’s Supply Industry’s Supply
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Short-Run Industry Equilibrium 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.
Background image of page 6
Short-Run Industry Equilibrium Market demand Short-run industry supply p s e Y s e Y Short-run equilibrium price clears the market and is taken as given by each firm.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Short-Run Industry Equilibrium y 1 y 2 y 3 AC AC AC MC s MC s MC s y 1 * y 2 * y 3 * p s e Firm 1 Firm 2 Firm 3
Background image of page 8
Short-Run Industry Equilibrium y 1 y 2 y 3 AC AC AC MC s MC s MC s y 1 * y 2 * y 3 * p s e Firm 1 Firm 2 Firm 3 Firm 1 wishes to remain in the industry. Firm 2 wishes to exit from the industry. Firm 3 is indifferent. Π 1 > 0 Π 2 < 0 Π 3 = 0
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Long-Run Industry Supply In the long-run every firm now in the industry is free to exit and firms now outside the industry are free to enter. The 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. How is this done?
Background image of page 10
Long-Run Industry Supply 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 p s e to fall. When does entry cease?
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Long-Run Industry Supply S (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 p 2 y 2 * Then the market-clearing price is p 2 . Each firm produces y 2 * units of output.
Background image of page 12
Long-Run Industry Supply S (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 p 2 y 2 * Π > 0 Each firm makes a positive economic profit, inducing entry by another firm.
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Long-Run Industry Supply S (p) S (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 p 2 Market supply shifts outwards.
Background image of page 14
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/18/2010 for the course ECOS 2001 taught by Professor None during the Three '09 term at University of Sydney.

Page1 / 123

Chapter 23 24 25 - Chapter Twenty-Three Industry Supply...

This preview shows document pages 1 - 15. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online