Where Do Supply Curves Come From?

What IS a Supply Curve? What is the MATHEMATICAL FORMULA for LINEAR Supply? P = b + aQ

Short-run Individual firm supply curve Why not here?? Shutdown! P<AVC What if price is here? Economic loss! Supply Curves are MC curves ABOVE the minimum AVC! Test yourself: Does the supply curve have anything to do with fixed costs? Where Do Supply Curves Come From?

Market Supply Curve The market supply is simply the sum of the individual firm QUANTITIES! Firm Supply curve:Quantity: Industry Supply: 100 firms each have identical supply curves: P = Q What is the industry supply curve? 1.Solve for Q 2.Multiply by n 3.Solve for P TEST YOURSELF: What is the industry shut down point?

What if firms have DIFFERENT individual supply curves? Firm #1:P = Q Firm #2:P = Q Firm #3:P = Q TEST YOURSELF: Which firm is the most cost-effective? What is each firm’s shut-down point? TEST YOURSELF: What is the industry shut-down point? What is the slope of the industry supply curve? TEST YOURSELF: What if there were 10 firms just like #1, 5 like #2 and 3 like #3? What would the industry supply curve be?

Short Run Producer Surplus Different firms have different minimum marginal costs PLPL ATC You can have a producer surplus and an economic loss Market Supply Curve Allocative efficiency: no consumer will buy more, no producer will produce more at any other price. PARETO OPTIMAL Different consumers have different marginal benefits

What Happens in the Long-Run in the Market? Shift in Supply Movement along the supply curve Q1Q1 Q2Q2 1.Producer surplus attracts more supply 2.More supply shifts the supply curve 3.The shift in the supply curve causes a decline in price but a higher equilibrium quantity. A decline in price without a shift in supply would be a movement along the supply curve and result in a lower equilibrium quantity. What Happens in the Long-Run in the Firm? 1.AFTER market prices decline (see above) 2.The new price intersects with long-run marginal cost at a lower quantity. 3.If the new price is below the firm’s short-run average variable cost it will shutdown! Firms still in business will have lower ATC curves 4.Each firm produces less even though the market supplies more.

Long-Run Competitive Equilibrium All firms produce identically at LMC=LAC=SMC=ATC=Price Do firms earn economic profits in the long run? Is there producer surplus in the long run?

Long-run supply price=MC=LAC Is there producer surplus in the long run? Supply when input prices do NOT vary with output quantity. No producer surplus! Supply when input prices INCREASE with output quantity. Supply curve slopes up, But still no producer surplus! Why?

Price Elasticity of Supply The percent change in quantity supplied as a result of a change in market price If the cost of inputs does not change with quantity, then the supply curve will be horizontal and the elasticity will be zero (technically undefined)

What is the SUPPY CURVE in the LONG RUN? Long run equilibrium PRICE In a PERFECTLY COMPETITIVE market

Organizations produce where marginal cost = marginal benefit on the rising part of the marginal cost curve!