1. Chapter Twenty-Three Industry Supply

2. Supply From A Competitive Industry How are the supply decisions of the many individual firms in a competitive industry to be combined to discover the market supply curve for the entire industry? 3. Supply From A Competitive Industry Since every firm in the industry is a price-taker, total quantity supplied at a given price is the sum of quantities supplied at that price by the individual firms. 4. Short-Run Supply In a short-run the number of firms in the industry is, temporarily, fixed. Let n be the number of firms; i = 1, ,n. Si(p) is firm is supply function. 5. Short-Run Supply In a short-run the number of firms in the industry is, temporarily, fixed. Let n be the number of firms; i = 1, ,n. Si(p) is firm is supply function. The industrys short-run supply function is n S(p ) = S i (p ). i =1 6. Supply From A Competitive Industry pFirm 1s SupplyS1(p)pFirm 2s SupplyS2(p) 7. Supply From A Competitive Industry pFirm 1s SupplypFirm 2s Supplyp pS1(p)S1(p)S2(p)p S1(p) Industrys SupplyS(p) = S1(p) + S2(p) 8. Supply From A Competitive Industry p pp pFirm 1s SupplyS1(p)pS1(p)S1(p)+S2(p) Industrys SupplyFirm 2s SupplyS2(p) S2(p)S(p) = S1(p) + S2(p) 9. Supply From A Competitive Industry ppFirm 1s SupplypS1(p)Firm 2s SupplyS2(p)S(p) = S1(p) + S2(p) Industrys Supply 10. Short-Run Industry Equilibrium In a short-run, neither entry nor exit can occur. Consequently, in a short-run equilibrium, some firms may earn positive economics profits, others may suffer economic losses, and still others may earn zero economic profit. 11. Short-Run Industry Equilibrium Short-run industry supply pse Market demand YseYShort-run equilibrium price clears the market and is taken as given by each firm. 12. Short-Run Industry Equilibrium Firm 1Firm 2 MCsACsFirm 3 ACsACs MCsMCs psey1*y1y2*y2y3*y3 13. Short-Run Industry Equilibrium Firm 1Firm 2 MCsACsFirm 3 ACsACs MCsMCs pse1 > 0 y1*y12 < 0 y2*y23 = 0 y3*y3 14. Short-Run Industry Equilibrium Firm 1 ACsFirm 2 MCsFirm 3 ACsMCsACs MCspse1 > 02 < 03 = 0y1 y2 y3 y1* y2* y3* Firm 1 wishes Firm 2 wishes Firm 3 is indifferent. to remain in to exit from the industry. the industry. 15. Long-Run Industry Supply In the long-run every firm now in the industry is free to exit and firms now outside the industry are free to enter. The industrys long-run supply function must account for entry and exit as well as for the supply choices of firms that choose to be in the industry. How is this done? 16. Long-Run Industry Supply Positive economic profit induces entry. Economic profit is positive when the market price pse is higher than a firms minimum av. total cost; pse > min AC(y). Entry increases industry supply, causing pse to fall. When does entry cease? 17. Long-Run Industry Supply pThe MarketpMkt. Demand S2(p)A Typical Firm MC(y) AC(y)Mkt. SupplyYySuppose the industry initially contains only two firms. 18. Long-Run Industry Supply pThe MarketpMkt. Demand S2(p)A Typical Firm MC(y) AC(y)p2p2YThen the market-clearing price is p 2.y 19. Long-Run Industry Supply pThe MarketpMkt. Demand S2(p)A Typical Firm MC(y) AC(y)p2p2Yy2*yThen the market-clearing price is p 2. Each firm produces y2* units of output. 20. Long-Run Industry Supply pThe MarketpMkt. Demand S2(p)A Typical Firm MC(y) AC(y)p2p2 >0 Yy2*yEach firm makes a positive economic profit, inducing entry by another firm. 21. Long-Run Industry Supply pp2The MarketpMkt. Demand S2(p)A Typical Firm MC(y) AC(y)S3(p)Yp2y2*Market supply shifts outwards.y 22. Long-Run Industry Supply pp2The MarketpMkt. Demand S2(p)A Typical Firm MC(y) AC(y)S3(p)Yp2y2*Market supply shifts outwards. Market price falls.y 23. Long-Run Industry Supply pThe MarketpMkt. Demand S2(p)A Typical Firm MC(y) AC(y)S3(p) p3p3YEach firm produces less.y3*y 24. Long-Run Industry Supply pThe MarketpMkt. Demand S2(p)A Typical Firm MC(y) AC(y)S3(p) p3p3Y>0 y3*yEach firm produces less. Each firms economic profit is reduced. 25. Long-Run Industry Supply pThe MarketpMkt. DemandA Typical Firm MC(y) AC(y)S3(p) p3p3Y>0 y3*yEach firms economic profit is positive. Will another firm enter? 26. Long-Run Industry Supply pThe MarketpMkt. DemandA Typical Firm MC(y) AC(y)p3S3(p) S4(p)Yp3 y3*yMarket supply would shift outwards again. 27. Long-Run Industry Supply pThe MarketpMkt. DemandA Typical Firm MC(y) AC(y)p3S3(p) S4(p)Yp3 y3*yMarket supply would shift outwards again. Market price would fall again. 28. Long-Run Industry Supply pThe MarketpMkt. DemandA Typical Firm MC(y) AC(y)S3(p) S4(p) p4p4 Yy4*Each firm would produce less again.y 29. Long-Run Industry Supply pThe MarketpMkt. DemandA Typical Firm MC(y) AC(y)S3(p) S4(p) p4p4 Y