Mkt supply 5 long run industry supply s 2 p mkt

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Mkt. Supply
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5 Long-Run Industry Supply S 2 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 p 2 y 2 * 3 > 0 Each firm makes a positive economic profit, inducing entry by another firm. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 p 2 Market supply shifts outwards. Market price falls. y 2 * Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 3 Each firm produces less. Each firm’s economic profit is reduced. y 3 * p 3 3 > 0
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6 Long-Run Industry Supply S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 3 Each firm’s economic profit is positive. Will another firm enter? y 3 * p 3 3 > 0 Long-Run Industry Supply S 4 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 3 Market supply would shift outwards again. Market price would fall again. y 3 * p 3 Long-Run Industry Supply S 4 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 4 Each firm would produce less again. Each firm’s economic profit would be negative. So the fourth firm would not enter. y 4 * 3 < 0 p 4
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7 Long-Run Industry Supply The long-run number of firms in the industry is the largest number for which the market price is at least as large as (perhaps greater than) min AC(y). Now we can construct the industry’s long-run supply curve. Long-Run Industry Supply Suppose that market demand is large enough to sustain only two firms in the industry. p 2 Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * p 2
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8 Long-Run Industry Supply Suppose that market demand is large enough to sustain only two firms in the industry. Then market demand increases, the market price rises, each firm produces more, and earns a higher economic profit. p 2 Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * p 2 p 2 Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * Notice that a 3rd firm will not enter since it would earn negative economic profits. p 2
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9 Long-Run Industry Supply As market demand increases further, the market price rises further, the two incumbent firms each produce more and earn still higher economic profits -- until a 3rd firm becomes indifferent between entering and staying out. p 2 ’” Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * A third firm can now enter, causing all firms to earn zero economic profits. p 2 ’” Long-Run Industry Supply Any further increase in market demand would surely cause entry, so that the number of firms in the industry would rise to three.
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10 p 2 ’” Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * The only relevant part of the short-run supply curve for n = 2 firms in the industry.
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