1Supply1.Firm Supply (Ch 22)2.Industry Supply(Ch 23)Recap the basic storylineShort 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 $MCIf P > MC, you earn more than what it costs you So you should produce moreyou. So you should produce moreIf P < MC, you get less than what it costs you. So you should produce lessThis suggests at equilibrium P = MC.WEEK 9-2 ECON2101 S1 20102Recap (contd).Two caveats/qualificationsIf p = MC at two points then choose If p MC at two points then choose the point on upward sloping part of MC curveMake sure that p > min AVC. Things one should not worry aboutWhat happens p = MC at more than two points two points. WEEK 9-2 ECON2101 S1 20103Short-Run SupplyIn 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.Si(p) is firm i’s supply function.The industry’s short-run supply The industry s short-run supply function is.)()(1∑==niipSpSWEEK 9-2 ECON2101 S1 20104Supply From A Competitive IndustryppFirm 1’s SupplyFirm 2’s SupplyS1(p)S2(p)pS(p) = S(p) + S(p)WEEK 9-2 ECON2101 S1 20105S(p) S1(p) S2Industry’s SupplyShort-Run Industry EquilibriumIn 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 20106
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