1. Chapter Twenty-Three Industry Supply

6. Supply From A Competitive Industry p S 1 (p) p S 2 (p) Firm 1’s Supply Firm 2’s Supply

7. Supply From A Competitive Industry p S 1 (p) p S 2 (p) p p’ p’ S 1 (p’) S 1 (p’) Firm 1’s Supply Firm 2’s Supply S(p) = S 1 (p) + S 2 (p) Industry’s Supply

8. Supply From A Competitive Industry p S 1 (p) p S 2 (p) p S(p) = S 1 (p) + S 2 (p) p” p” S 1 (p”) S 1 (p”)+S 2 (p”) S 2 (p”) Firm 1’s Supply Firm 2’s Supply Industry’s Supply

9. Supply From A Competitive Industry p S 1 (p) p S 2 (p) p Firm 1’s Supply Firm 2’s Supply S(p) = S 1 (p) + S 2 (p) Industry’s Supply

11. Short-Run Industry Equilibrium Market demand Short-run industry supply p s e Y s e Y Short-run equilibrium price clears the market and is taken as given by each firm.

12. Short-Run Industry Equilibrium y 1 y 2 y 3 AC s AC s AC s MC s MC s MC s y 1 * y 2 * y 3 * p s e Firm 1 Firm 2 Firm 3

13. Short-Run Industry Equilibrium y 1 y 2 y 3 AC s AC s AC s MC s MC s MC s y 1 * y 2 * y 3 * p s e Firm 1 Firm 2 Firm 3   > 0   < 0   = 0

14. Short-Run Industry Equilibrium y 1 y 2 y 3 AC s AC s AC s MC s MC s MC s y 1 * y 2 * y 3 * p s e Firm 1 Firm 2 Firm 3 Firm 1 wishes to remain in the industry. Firm 2 wishes to exit from the industry. Firm 3 is indifferent.   > 0   < 0   = 0

17. Long-Run Industry Supply S 2 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y Suppose the industry initially contains only two firms. Mkt. Supply

18. Long-Run Industry Supply S 2 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 p 2 Then the market-clearing price is p 2 .

19. Long-Run Industry Supply S 2 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 p 2 y 2 * Then the market-clearing price is p 2 . Each firm produces y 2 * units of output.

20. Long-Run Industry Supply S 2 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 p 2 y 2 *  > 0 Each firm makes a positive economic profit, inducing entry by another firm.

21. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 p 2 Market supply shifts outwards. y 2 *

22. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 p 2 Market supply shifts outwards. Market price falls. y 2 *

23. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 3 Each firm produces less. y 3 * p 3

24. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 3 Each firm produces less. Each firm’s economic profit is reduced. y 3 * p 3  > 0

25. Long-Run Industry Supply S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 3 Each firm’s economic profit is positive. Will another firm enter? y 3 * p 3  > 0

26. Long-Run Industry Supply S 4 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 3 Market supply would shift outwards again. y 3 * p 3

27. Long-Run Industry Supply S 4 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 3 Market supply would shift outwards again. Market price would fall again. y 3 * p 3

28. Long-Run Industry Supply S 4 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 4 Each firm would produce less again. y 4 * p 4

29. Long-Run Industry Supply S 4 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 4 Each firm would produce less again. Each firm’s economic profit would be negative. y 4 *  < 0 p 4

30. Long-Run Industry Supply S 4 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 4 Each firm would produce less again. Each firm’s economic profit would be negative. So the fourth firm would not enter. y 4 *  < 0 p 4

33. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 ’ y 2 * p 2 ’

35. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 ’ y 2 * p 2 ’

36. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 2 ” y 2 * p 2 ”

37. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * p 2 ” p 2 ”

38. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * Notice that a 3rd firm will not enter since it would earn negative economic profits. p 2 ” p 2 ”

40. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * p 2 ” p 2 ”

41. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * p 2 ’” p 2 ’”

42. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * A third firm can now enter, causing all firms to earn zero economic profits. p 2 ’” p 2 ’”

44. Long-Run Industry Supply S 2 (p) S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 2 * The only relevant part of the short-run supply curve for n = 2 firms in the industry. p 2 ’” p 2 ’”

46. Long-Run Industry Supply Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 3 ’ y 3 * S 3 (p) S 4 (p) p 3 ’

47. Long-Run Industry Supply Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y p 3 ’ y 3 * A 4th firm would now earn negative economic profits if it entered the industry. p 3 ’ S 3 (p) S 4 (p)

48. Long-Run Industry Supply S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 3 * S 4 (p) But now a 4th firm would earn zero economic profit if it entered the industry. p 3 ’ p 3 ’

49. Long-Run Industry Supply S 3 (p) Mkt. Demand AC(y) MC(y) y A “Typical” Firm The Market p p Y y 3 * S 4 (p) p 3 ’ p 3 ’ The only relevant part of the short-run supply curve for n = 3 firms in the industry.

51. Long-Run Industry Supply AC(y) MC(y) y A “Typical” Firm The Market Long-Run Supply Curve p p Y y 3 *

52. Long-Run Industry Supply AC(y) MC(y) y A “Typical” Firm The Market Long-Run Supply Curve p p Y y 3 * Notice that the bottom of each segment of the supply curve is min AC(y).

54. Long-Run Industry Supply AC(y) MC(y) y A “Typical” Firm The Market Long-Run Supply Curve p p Y y 3 * Notice that the bottom of each segment of the supply curve is min AC(y).

55. Long-Run Industry Supply AC(y) MC(y) y A “Typical” Firm The Market Long-Run Supply Curve p p Y y* The bottom of each segment of the supply curve is min AC(y). As firms get “smaller” the segments get shorter.

56. Long-Run Industry Supply AC(y) MC(y) y A “Typical” Firm The Market Long-Run Supply Curve p p Y y* In the limit, as firms become infinitesimally small, the industry’s long-run supply curve is horizontal at min AC(y).

59. Long-Run Implications for Taxation LR supply (no tax) p X,Y Mkt. demand Q e p e

60. Long-Run Implications for Taxation LR supply (no tax) p X,Y Mkt. demand Q e p s =p e LR supply (with tax) Q t p b = p e +t t

61. Long-Run Implications for Taxation LR supply (no tax) p X,Y Mkt. demand Q e p s =p e LR supply (with tax) Q t p b = p e +t t In the long-run the buyers pay all of a sales or an excise tax.

68. Fixed Inputs and Economic Rent y $/output unit AC(y) AVC(y) MC(y) y* p e The firm’s economic profit is zero.

69. Fixed Inputs and Economic Rent y $/output unit AC(y) AVC(y) MC(y) y* p e F The firm’s economic profit is zero. F is the payment to the owner of the fixed input (the license).

71. Fixed Inputs and Economic Rent y $/output unit AC(y) AVC(y) MC(y) y* p e F The firm’s economic profit is zero. F is the payment to the owner of the fixed input (the license); F = economic rent.