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Six per page_Week 9_Part II_ECON2101_S1_2010

# Six per page_Week 9_Part II_ECON2101_S1_2010 - Recap the...

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1 Supply 1. Firm Supply (Ch 22) 2. Industry Supply(Ch 23) Recap the basic storyline Short run supply curve is obtained by equating p = MC. Why? Producing and selling one more unit fetches \$P Cost of prodcing one more unit is \$MC If P > MC, you earn more than what it costs you So you should produce more you. So you should produce more If P < MC, you get less than what it costs you. So you should produce less This suggests at equilibrium P = MC. WEEK 9-2 ECON2101 S1 2010 2 Recap (contd). Two caveats/qualifications If p = MC at two points then choose If p MC at two points then choose the point on upward sloping part of MC curve Make sure that p > min AVC. Things one should not worry about What happens p = MC at more than two points two points. WEEK 9-2 ECON2101 S1 2010 3 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. i 1, … ,n. S i (p) is firm i’s supply function. The industry’s short-run supply The industry s short-run supply function is . ) ( ) ( 1 = = n i i p S p S WEEK 9-2 ECON2101 S1 2010 4 Supply From A Competitive Industry p p Firm 1’s Supply Firm 2’s Supply S 1 (p) S 2 (p) p S(p) = S (p) + S (p) WEEK 9-2 ECON2101 S1 2010 5 S(p) S 1 (p) S 2 Industry’s Supply 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. WEEK 9-2 ECON2101 S1 2010 6

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