Industry Supply Curve Ap micro 10/16

Warm Up What is the firm’s break even price? How many units would this firm produce at that price? What is the firm’s shut down price? If the price was P5, how many units would the firm produce? If this firm was producing 11 units, what must the marginal revenue be? Assume P5 is $10. What would be total revenue generated? For each question, assume the firm is producing the profit maximizing quantity.

Equilibrium Price For a competitive firm, the short-run supply curve is drawn by applying the MR=(P=)MC rule Market equilibrium price is the price at which the total quantity supplied of the product equals the total quantity demanded.

SR Industry Supply Curve The short-run industry supply curve shows how the quantity supplied by an industry depends on the market price given a fixed number of producers. short-run market equilibrium: quantity supplied equals the quantity demanded

Short Run Market Equilibrium Price, cost of bushel The short-run industry supply curve shows how the quantity supplied by an industry depends on the market price given a fixed number of producers. Short-run industry supply curve, S $26 22 E MKT Market price 18 D 14 Shut-down price 10 There is a short-run market equilibrium when the quantity supplied equals the quantity demanded, taking the number of producers as given. 200 300 400 500 600 700 Quantity of tomatoes (bushels)

Long Run Industry Supply Curve A market is in long-run market equilibrium when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur. For a single firm, long –run equilibrium occurs when : MR=MC=P P= minimum ATC No firms have the incentive to enter or exit Industry in equilibrium (at rest)

Long Run Market Equilibrium (a) Market (b) Individual Firm Price, cost of bushel Price, cost of bushel MC S S S 1 2 3 $18 E MKT $18 E A 16 D 16 MKT D A T C B E is initial SR equilibrium. Green A—econ profit at that amt. Profits make suppliers want to enter market so move supply out to S3. Until in LR P is equal to break even price, zero profit and no incentive to enter or exit the insustry so C is LR equilibrium 14.40 Break- even price Z 14 C 14 Y MKT C D 500 750 1,000 3 4 4.5 5 6 Quantity of tomatoes (bushels) Quantity of tomatoes (bushels) A market is in long-run market equilibrium when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur.

Entry Eliminates Economic Profit In LR

Exit Eliminates Economic Loss in the LR

The Effect of and Increase in Demand in the SR and LR (b) Short-Run and Long-Run Market Response to Increase in Demand (a) Existing Firm Response to Increase in Demand (a) Existing Firm Response to New Entrants Price, cost Price Price, cost Long-run industry supply curve, Higher industry output from new entrants drive price and profit back down. An increase in demand raises price and profit. LRS S S MC 1 2 MC $18 Y Y A T C Y A T C MKT 14 X X Z D Z MKT MKT 2 D 1 Quantity Q Q Q X Y Z Quantity Quantity The LRS shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry. Increase in output from new entrants D↑  P↑  non-zero profits  entry  S↑  P↓  back to zero profit (on LRS curve)

SR Vs. LR Industry Supply Curve The long run industry supply curve may slope upward, but it is always flatter (more elastic) than the short run industry supply curve. This is because of entry and exit—higher price attracts new firms in the LR, resulting in an increase in output and fall in price

LR Supply Curve for a Constant Cost Industry Industry expansion or contraction will not affect resource prices or production costs Entry and exit does not shift the long-run ATC curves of individual firms Industry demand for resources is small relative to the amount of resources available Long run supply curve is perfectly elastic