1. The Industry Supply Curve

2. Industry Supply Curve Industry Supply Curve is the relationship between price and the total output of an industry as a whole Industry Supply Curve is the relationship between price and the total output of an industry as a whole Up to this point, was called the supply curve or the market supply curve Up to this point, was called the supply curve or the market supply curve

3. Short-Run Industry Supply Curve Jennifer and Jason’s farm is producing organic tomatoes and assume there are 100 organic tomatoes farms and they all have the same costs as Jennifer and Jason Jennifer and Jason’s farm is producing organic tomatoes and assume there are 100 organic tomatoes farms and they all have the same costs as Jennifer and Jason

4. The Short-Run Market Equilibrium 7006005004003002000 $26 22 18 14 10 D Short-run industry supply curve, S E MKT Shut-down price Price, cost of bushel Quantity of tomatoes (bushels) Market price All 100 farms has the same individual short-run supply curve. At the price below $10, no farms will produce. At a price of more than $10, each farm will produce the quantity of output at which its marginal cost is equal to the market price. Each farm will produce 4 bushels if the price is $14, at 5 bushels the price is…..6 bushels……

5. Short-Run Industry Supply Curve All leads to the short-run industry supply curve All leads to the short-run industry supply curve This curve shows how the quantitative supplied by an industry depends on the market price given by a fixed number of producers This curve shows how the quantitative supplied by an industry depends on the market price given by a fixed number of producers

6. Short-Run Industry Supply Curve E MKT is the short-run market equilibrium E MKT is the short-run market equilibrium where the quantity supplied equals the Quantity demanded, taking the number of producers as given

7. Long-Run Industry Supply Curve New producers will enter the industry whenever existing producers are making a profit – whenever the market price is above the break-=even price of $14 a bushel New producers will enter the industry whenever existing producers are making a profit – whenever the market price is above the break-=even price of $14 a bushel If the new firms enter the industry, the quantity supplied at any given price will increase If the new firms enter the industry, the quantity supplied at any given price will increase

8. Long-Run Industry Supply Curve The EMKT had a equilibrium market price of $18 and a quantity of 500 bushels. At this price, existing producers are profitable The EMKT had a equilibrium market price of $18 and a quantity of 500 bushels. At this price, existing producers are profitable The existing firm makes a total The existing firm makes a total Profit shown by the A rectangle when the market price is $18 These profits will induce new These profits will induce new producers to enter the industry, shifting the short-run industry supply curve to the right

9. Long-Run Industry Supply Curve The effect of the new producers on the existing farm is a fall in price causes it to reduce its output and its profits fall to the rectangle B The effect of the new producers on the existing farm is a fall in price causes it to reduce its output and its profits fall to the rectangle B The profit of the existing firms is diminishing to DMKT but this also means that the numbers of firms will continue to rise The profit of the existing firms is diminishing to DMKT but this also means that the numbers of firms will continue to rise

10. Long-Run Industry Supply Curve EMKT and DMKT and CMKT is a short-run equilibrium EMKT and DMKT and CMKT is a short-run equilibrium Since the price of $14 is each firm’s break-even price, an existing producer makes zero profit, earning only opportunity cost of the resource used in production Since the price of $14 is each firm’s break-even price, an existing producer makes zero profit, earning only opportunity cost of the resource used in production CMKT = long-run market equilibrium which is when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur CMKT = long-run market equilibrium which is when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

11. Long-Run Industry Supply Curve In the long-run market equilibrium, all existing and potential producer have fully adjusted to their optimal long-run choices, as a result, no producer has an incentive to either enter or exit the industry In the long-run market equilibrium, all existing and potential producer have fully adjusted to their optimal long-run choices, as a result, no producer has an incentive to either enter or exit the industry

12. The Effect of an Increase in Demand in the Short Run and the Long Run MC ATC X Y 000 $18 14 Quantity MC ATC Z Y Price S 1 D 1 D 2 S 2 Y MKT X Z LRS Q X Q Y Q Z (a) Existing Firm Response to Increase in Demand (b) Short-Run and Long-Run Market Response to Increase in Demand (a) Existing Firm Response to New Entrants Price, cost Increase in output from new entrants An increase in demand raises price and profit. Long-run industry supply curve, Higher industry output from new entrants drive price and profit back down. Quantity

13. Long-Run Industry Supply Curve The LRS line that passes through XMKT and ZMKT is the long-run industry supply curve The LRS line that passes through XMKT and ZMKT is the long-run industry supply curve – Shows how the quantity supplied by an industry responds to the price given that producers have had time to enter or exit the industry In the example, the long-run industry supply curve is horizontal at $14 – what does this say about its elasticity? In the example, the long-run industry supply curve is horizontal at $14 – what does this say about its elasticity?

14. Long-Run Industry Supply Curve Perfectly elastic! Perfectly elastic! In the example, the industry supply is perfectly elastic in the long run In the example, the industry supply is perfectly elastic in the long run Perfectly elastic long-run supply is actually an assumption for many industries—it shows constant costs across the industry Perfectly elastic long-run supply is actually an assumption for many industries—it shows constant costs across the industry – Each firm (regardless of it being an incumbent or a new entrant) faces the same cost structure

15. Long-Run Industry Supply Curve Example of these industries: agriculture or bakeries Example of these industries: agriculture or bakeries – Use some product that is in limited supply (inelastically supplied) When industry expands…..price of that input is driven up When industry expands…..price of that input is driven up Consequently, later entrants in the industry find that they have a higher cost structure than early entrants Consequently, later entrants in the industry find that they have a higher cost structure than early entrants – Example: beachfront resort hotels

16. Long-Run Industry Supply Curve Regardless of if long-run industry supply curve is horizontal or upward sloping or even downward sloping, the long-run price elasticity of supply is HIGHER than the short-run elasticity whenever there is free entry and exit Regardless of if long-run industry supply curve is horizontal or upward sloping or even downward sloping, the long-run price elasticity of supply is HIGHER than the short-run elasticity whenever there is free entry and exit

17. Long-Run Industry Supply Curve Long-run industry supply curve is always flatter than the short-run industry supply curve Long-run industry supply curve is always flatter than the short-run industry supply curve WHY???? WHY???? The reason is entry and exit – a high price caused by an increase in demand attracts entry by new producers, resulting in a rise in industry output and an eventual fall in price The reason is entry and exit – a high price caused by an increase in demand attracts entry by new producers, resulting in a rise in industry output and an eventual fall in price

18. The Cost of Production & Efficiency in Long-Run Equilibrium Three conclusions about cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry: Three conclusions about cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry: 1.in a perfectly competitive industry in equilibrium, value of marginal cost is the same for all firms – WHY? – All firms produce the quantity of output at which MC equals the market price and as price- takers, all face the same market price

19. The Cost of Production & Efficiency in Long-Run Equilibrium 2.In a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in long-run equilibrium – Firms produce the quantity of output that minimizes its ATC – TC of production of the industry’s output is minimized in a perfectly competitive industry

20. The Cost of Production & Efficiency in Long-Run Equilibrium 3.Long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited – WHY? – All consumers have a willingness to pay greater than or equal to sellers’ cost actually get the good

21. The Cost of Production & Efficiency in Long-Run Equilibrium In the long-run equilibrium of a perfectly competitive industry, production is efficient: costs are minimized and no resources are wasted In the long-run equilibrium of a perfectly competitive industry, production is efficient: costs are minimized and no resources are wasted Allocation of goods to consumers is efficient: every consumer willing to pay the cost of producing a unit of the good gets it Allocation of goods to consumers is efficient: every consumer willing to pay the cost of producing a unit of the good gets it

22. The Industry Supply Curve Notes

23. Industry Supply Curve Industry Supply Curve is Industry Supply Curve is Up to this point, was called the supply curve or the market supply curve Up to this point, was called the supply curve or the market supply curve

24. The Short-Run Market Equilibrium 7006005004003002000 $26 22 18 14 10 D Short-run industry supply curve, S E MKT Shut-down price Price, cost of bushel Quantity of tomatoes (bushels) Market price

25. Short-Run Industry Supply Curve All leads to the short-run industry supply curve All leads to the short-run industry supply curve This curve shows how the This curve shows how the

26. Short-Run Industry Supply Curve E MKT is the short-run market equilibrium E MKT is the short-run market equilibrium where the

27. Long-Run Industry Supply Curve New producers will enter the industry whenever existing producers are making a profit – whenever the market price is above the break-=even price of $14 a bushel New producers will enter the industry whenever existing producers are making a profit – whenever the market price is above the break-=even price of $14 a bushel If the new firms enter the industry, the quantity supplied at any given price will increase If the new firms enter the industry, the quantity supplied at any given price will increase

28. Long-Run Industry Supply Curve The EMKT had a equilibrium market price of $18 and a quantity of 500 bushels. At this price, existing producers are profitable The EMKT had a equilibrium market price of $18 and a quantity of 500 bushels. At this price, existing producers are profitable The existing firm makes a total The existing firm makes a total Profit shown by the A rectangle when the market price is $18 These profits will induce new These profits will induce new producers to enter the industry, shifting the short-run industry supply curve to the right

29. Long-Run Industry Supply Curve The effect of the new producers on the existing farm is a fall in price causes it to reduce its output and its profits fall to the rectangle B The effect of the new producers on the existing farm is a fall in price causes it to reduce its output and its profits fall to the rectangle B The profit of the existing firms is diminishing to DMKT but this also means that the numbers of firms will continue to rise The profit of the existing firms is diminishing to DMKT but this also means that the numbers of firms will continue to rise

30. Long-Run Industry Supply Curve EMKT and DMKT and CMKT is a short-run equilibrium EMKT and DMKT and CMKT is a short-run equilibrium Since the price of $14 is each firm’s break-even price, an existing producer makes zero profit, Since the price of $14 is each firm’s break-even price, an existing producer makes zero profit, CMKT = long-run market equilibrium which is when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur CMKT = long-run market equilibrium which is when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

31. Long-Run Industry Supply Curve In the long-run market equilibrium, In the long-run market equilibrium,

32. The Effect of an Increase in Demand in the Short Run and the Long Run MC ATC X Y 000 $18 14 Quantity MC ATC Z Y Price S 1 D 1 D 2 S 2 Y MKT X Z LRS Q X Q Y Q Z (a) Existing Firm Response to Increase in Demand (b) Short-Run and Long-Run Market Response to Increase in Demand (a) Existing Firm Response to New Entrants Price, cost Quantity

33. Long-Run Industry Supply Curve The LRS line that passes through XMKT and ZMKT is the long-run industry supply curve The LRS line that passes through XMKT and ZMKT is the long-run industry supply curve In the example, the long-run industry supply curve is horizontal at $14 – what does this say about its elasticity? In the example, the long-run industry supply curve is horizontal at $14 – what does this say about its elasticity?

34. Long-Run Industry Supply Curve __________________! __________________! In the example, the industry supply is perfectly elastic in the long run In the example, the industry supply is perfectly elastic in the long run Perfectly elastic long-run supply is actually an assumption for many industries—it shows constant costs across the industry Perfectly elastic long-run supply is actually an assumption for many industries—it shows constant costs across the industry

35. Long-Run Industry Supply Curve Example of these industries: agriculture or bakeries Example of these industries: agriculture or bakeries When industry expands…..price of that input is driven up When industry expands…..price of that input is driven up Consequently, later entrants in the industry find that they have a higher cost structure than early entrants Consequently, later entrants in the industry find that they have a higher cost structure than early entrants

36. Long-Run Industry Supply Curve Regardless of if long-run industry supply curve is horizontal or upward sloping or even downward sloping, the long-run price elasticity of supply is HIGHER than the short-run elasticity whenever there is free entry and exit Regardless of if long-run industry supply curve is horizontal or upward sloping or even downward sloping, the long-run price elasticity of supply is HIGHER than the short-run elasticity whenever there is free entry and exit

37. Long-Run Industry Supply Curve Long-run industry supply curve is always flatter than the short-run industry supply curve Long-run industry supply curve is always flatter than the short-run industry supply curve WHY???? WHY???? The reason is entry and exit – The reason is entry and exit –

38. The Cost of Production & Efficiency in Long-Run Equilibrium Three conclusions about cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry: Three conclusions about cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry: 1.in a perfectly competitive industry in equilibrium, value of marginal cost is the same for all firms

39. The Cost of Production & Efficiency in Long-Run Equilibrium 2.In a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in long-run equilibrium

40. The Cost of Production & Efficiency in Long-Run Equilibrium 3.Long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited

41. The Cost of Production & Efficiency in Long-Run Equilibrium In the long-run equilibrium of a perfectly competitive industry, production is efficient: In the long-run equilibrium of a perfectly competitive industry, production is efficient: Allocation of goods to consumers is efficient: every consumer willing to pay the cost of producing a unit of the good gets it Allocation of goods to consumers is efficient: every consumer willing to pay the cost of producing a unit of the good gets it