1. Industry Supply Curve
Ap micro 10/16

2. 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.

3. 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.

4. 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

5. 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)

6. 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)

7. 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.

8. Entry Eliminates Economic Profit In LR

9. Exit Eliminates Economic Loss in the LR

10. 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)

11. 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

12. 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