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Ch23 - Chapter Twenty-Three Industry Supply Supply From A...

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Chapter Twenty-Three Industry Supply

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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?
Supply From A Competitive 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.

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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.
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

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Supply From A Competitive Industry p S 1 (p) p S 2 (p) Firm 1’s Supply Firm 2’s Supply
Supply From A 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

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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
Supply From A Competitive Industry p S 1 (p) p S 2 (p) p Firm 1’s Supply Firm 2’s Supply S(p) = S 1 (p) + S 2 (p) 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.
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.

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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
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 Π 1 > 0 Π 2 < 0 Π 3 = 0

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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. Π 1 > 0 Π 2 < 0 Π 3 = 0
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?

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Ch23 - Chapter Twenty-Three Industry Supply Supply From A...

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