1. Chapter 23 Industry Supply

2. 23.1 Short-Run Industry Supply
The supply curve of firm i: Si(p)
The industry supply curve:

3. 23.1 Short-Run Industry Supply
S1+S2 y

4. 23.2 Industry Equilibrium in the Short Run
Positive profits MC AC P*
AVC y

5. 23.2 Industry Equilibrium in the Short Run
Zero profits MC AC
AVC P* y

6. 23.2 Industry Equilibrium in the Short Run
Negative profits but stays in business MC AC
AVC P* y

7. 23.2 Industry Equilibrium in the Short Run
Shutting down MC AC
AVC P* y

8. 23.2 Industry Equilibrium in the Short Run
p>minAC: making positive profits.
p=minAC: making zero profits.
minAVC<p<minAC: making losses but stays in business.
p<minAVC: shutting down.

9. 23.3 Industry Equilibrium in the Long Run
The long-run supply curve.
LMC
LAC y

10. 23.3 Industry Equilibrium in the Long Run
Industry supply with multiple firms S3 S4 S1 S2 P* y

11. 23.3 Industry Equilibrium in the Long Run
Free entry: There are no restrictions against new firms entering the industry in most competitive industries.
Barriers to entry: such as licenses or legal restrictions on how many firms can be in the industry.

12. 23.3 Industry Equilibrium in the Long Run
Three firms: positive profits S3 S4 S1 S2 P’ P* D y

13. 23.3 Industry Equilibrium in the Long Run
Four firms: no equilibrium, one firm has to exit. S3 S4 S1 S2 P* D y

14. 23.4 The Long-Run Supply Curve
Eliminating portions of the supply curves that can never be intersections with a market demand curve S3 S4 S1 S2 P* y

15. 23.4 The Long-Run Supply Curve
The long-run industry supply curve gets increasingly flatter
The actual supply curve P*
The approximate supply curve y

16. 23.4 The Long-Run Supply Curve
The long-run supply curve will be approximately flat at price equals minimum average cost.
Profits should be close to zero in industries with free entry.

17. EXAMPLE: Taxation in the short run and long run
Tax sharing in the short run.
Shifted short-run supply p
short-run supply pd p* ps
demand y

18. EXAMPLE: Taxation in the short run and long run
Consumers bear the tax in the long run p
Shifted long-run supply pd
long-run supply
p* =ps
demand y

19. 23.5 The Meaning of Zero Profits
In an industry with free entry, profits are driven to zero by free entry.
All factors are paid their market price—the same market price that these factors could earn elsewhere.
No pure profits to attract factors to enter or to leave the industry.
Industries in long-run equilibrium with zero profits are mature industries.

20. 23.6 Fixed Factors and Economic Rent
The supply of some factors are fixed.
Resource, talent, license.
Entry is under restriction.
It seems the industry may end up with positive profits in the long run.
Potential entrants bid up the price of the fixed factors.
Profits are absorbed by rental costs of the fixed factors.
Profits become zero in the long run.

21. 23.7 Economic Rent
Economic rent: payments to a factor that are in excess of the minimum payment necessary to have that factor supplied.
Economic cost of land supply: zero
Market price of land: $1000 an acre
Economic rent: $1000 an acre.
The land rent adjusts to drive farming profits to zero.

22. 23.7 Economic Rent
Economic rent for land: The shared area represents the economic rent on the land.