ch23lec - Chapter 23 Industry Supply Supply From A...

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Chapter 23 Industry Supply
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Supply From A Competitive Industry •H o w a r e t h e s u p p l y 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. Short-Run Supply •I n a s h o r t - r u n t h e n u m b e r of firms in the industry is, temporarily, fixed. •L e t n b e t h e n u m b e r o f firms; i = 1, … ,n. •S i (p) is firm i’s supply function. •T h e i n d u s t r y s s h o r t - r u n supply function is Sp S p i i n () . ¦ 1
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Supply From A 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
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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.) 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.
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Short-Run Industry Equilibrium y 1 y 2 y 3 AC s AC s AC s 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. 3 ± > 0 3 ² < 0 3 ³ = 0
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Long-Run Industry Supply •I n t h e l o n g - r u n e v e r y f i r m n o w i n t h e i n d u s t r y i s f r e e t o exit and firms now outside the industry are free to enter. •T h e i n d u s t r y s l o n g - r u n s u p p l y f u n c t i o n m u s t a c c o u n t f o r entry and exit as well as for the supply choices of firms that choose to be in the industry. •H o w i s t h i s d o n e ? •P o s i t i v e e c o n o m i c p r o f i t i n d u c e s e n t r y . •E c o n o m i c p r o f i t i s p o s i t i v e w h e n t h e m a r k e t p r i c e p s e is higher than a firm’s minimum av. total cost; p s e > min AC(y).
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This note was uploaded on 10/25/2011 for the course ECON 326 taught by Professor Hulten during the Spring '08 term at Maryland.

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ch23lec - Chapter 23 Industry Supply Supply From A...

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