the industry supply curve

The Industry Supply The Industry Supply CurveCurve

Industry Supply CurveIndustry Supply Curve

• Industry Supply Curve is the relationship Industry Supply Curve is the relationship between price and the total output of between price and the total output of an industry as a wholean industry as a whole

• Up to this point, was called the supply Up to this point, was called the supply curve or the market supply curvecurve or the market supply curve

Short-Run Industry Supply CurveShort-Run Industry Supply Curve

• Jennifer and Jason’s farm is Jennifer and Jason’s farm is producing organic tomatoes and producing organic tomatoes and assume there are 100 organic assume there are 100 organic tomatoes farms and they all have tomatoes farms and they all have the same costs as Jennifer and Jasonthe same costs as Jennifer and Jason

The Short-Run Market EquilibriumThe Short-Run Market Equilibrium

7006005004003002000

$26

22

18

14

10

D

Short-run industry supply curve, S

EMKT

Shut-down price

Price, cost of bushel

Quantity of tomatoes (bushels)

Market price

All 100 farms has the same individual All 100 farms has the same individual short-run supply curve.short-run supply curve.

At the price below $10, no farms will At the price below $10, no farms will produce.produce.

At a price of more than $10, each farm will At a price of more than $10, each farm will produce the quantity of output at which its produce the quantity of output at which its marginal cost is equal to the market price.marginal cost is equal to the market price.

Each farm will produce 4 bushels if the Each farm will produce 4 bushels if the price is $14, at 5 bushels the price is…..6 price is $14, at 5 bushels the price is…..6

bushels……bushels……


• All leads to the short-run industry All leads to the short-run industry supply curvesupply curve

• This curve shows how the This curve shows how the quantitative supplied by an industry quantitative supplied by an industry depends on the market price given depends on the market price given by a fixed number of producersby a fixed number of producers


• EEMKTMKT is the short-run market equilibrium is the short-run market equilibrium

where the where the quantity supplied quantity supplied equals the equals the Quantity Quantity demanded, taking demanded, taking the number of producers as giventhe number of producers as given

Long-Run Industry Supply CurveLong-Run Industry Supply Curve

• New producers will enter the industry New producers will enter the industry whenever existing producers are whenever existing producers are making a profit – whenever the market making a profit – whenever the market price is above the break-=even price of price is above the break-=even price of $14 a bushel$14 a bushel

• If the new firms enter the industry, the If the new firms enter the industry, the quantity supplied at any given price will quantity supplied at any given price will increaseincrease


• The EMKT had a equilibrium market price of $18 and a The EMKT had a equilibrium market price of $18 and a quantity of 500 bushels. At this price, existing quantity of 500 bushels. At this price, existing producers are profitableproducers are profitable

• The existing firm makes a totalThe existing firm makes a totalProfit shown by the A rectangle Profit shown by the A rectangle when the market price is $18when the market price is $18• These profits will induce new These profits will induce new producers to enter the industry, producers to enter the industry, shifting the short-run industry supply curve to theshifting the short-run industry supply curve to therightright


• The effect of the new producers on the The effect of the new producers on the existing farm is a fall in price causes it to existing farm is a fall in price causes it to reduce its output and its profits fall to the reduce its output and its profits fall to the rectangle Brectangle B

• The profit of the existing firms is diminishing The profit of the existing firms is diminishing to DMKT but this also means that the to DMKT but this also means that the numbers of firms will continue to risenumbers of firms will continue to rise

Long-Run Industry Supply CurveLong-Run Industry Supply Curve• EMKT and DMKT and CMKT is a short-run EMKT and DMKT and CMKT is a short-run

equilibriumequilibrium• Since the price of $14 is each firm’s break-even Since the price of $14 is each firm’s break-even

price, an existing producer makes zero profit, price, an existing producer makes zero profit, earning only opportunity cost of the resource earning only opportunity cost of the resource used in productionused in production

• CMKT = long-run market equilibrium which is CMKT = long-run market equilibrium which is when the quantity supplied equals the quantity when the quantity supplied equals the quantity demanded, given that sufficient time has demanded, given that sufficient time has elapsed for entry into and exit from the industry elapsed for entry into and exit from the industry to occurto occur


• In the long-run market equilibrium, all In the long-run market equilibrium, all existing and potential producer have existing and potential producer have fully adjusted to their optimal long-run fully adjusted to their optimal long-run choices, as a result, no producer has an choices, as a result, no producer has an incentive to either enter or exit the incentive to either enter or exit the industryindustry

The Effect of an Increase in Demand in the The Effect of an Increase in Demand in the Short Run and the Long RunShort Run and the Long Run

MC

ATC

X

Y

0 0 0

$18

14

Quantity

MC

ATC

Z

Y

Price

S1

D1

D2

S2

YMKT

XMKT

ZMKT

LRS

QXQY QZ

(a) Existing Firm Response to Increase in Demand

(b) Short-Run and Long-Run Market Response to Increase in Demand

(a) Existing Firm Response to New Entrants

Price, cost

Price, cost

Increase in output from new entrants

An increase in demand raises price and profit.

Long-run industry

supply curve,

Higher industry output from new entrants drive price and profit back down.

Quantity Quantity


• The LRS line that passes through XMKT and The LRS line that passes through XMKT and ZMKT is the long-run industry supply curveZMKT is the long-run industry supply curve– Shows how the quantity supplied by an industry Shows how the quantity supplied by an industry

responds to the price given that producers have responds to the price given that producers have had time to enter or exit the industryhad time to enter or exit the industry

• In the example, the long-run industry supply In the example, the long-run industry supply curve is horizontal at $14 – what does this curve is horizontal at $14 – what does this say about its elasticity?say about its elasticity?

Long-Run Industry Supply CurveLong-Run Industry Supply Curve• Perfectly elastic!Perfectly elastic!• In the example, the industry supply is In the example, the industry supply is

perfectly elastic in the long runperfectly elastic in the long run• Perfectly elastic long-run supply is actually Perfectly elastic long-run supply is actually

an assumption for many industries—it shows an assumption for many industries—it shows constant costs across the industryconstant costs across the industry– Each firm (regardless of it being an incumbent Each firm (regardless of it being an incumbent

or a new entrant) faces the same cost structureor a new entrant) faces the same cost structure


• Example of these industries: agriculture or Example of these industries: agriculture or bakeriesbakeries– Use some product that is in limited supply (inelastically Use some product that is in limited supply (inelastically

supplied)supplied)

• When industry expands…..price of that input is When industry expands…..price of that input is driven updriven up

• Consequently, later entrants in the industry find Consequently, later entrants in the industry find that they have a higher cost structure than early that they have a higher cost structure than early entrantsentrants– Example: beachfront resort hotelsExample: beachfront resort hotels


• Regardless of if long-run industry supply Regardless of if long-run industry supply curve is horizontal or upward sloping or curve is horizontal or upward sloping or even downward sloping, the long-run even downward sloping, the long-run price elasticity of supply is HIGHER than price elasticity of supply is HIGHER than the short-run elasticity whenever there the short-run elasticity whenever there is free entry and exitis free entry and exit


• Long-run industry supply curve is always Long-run industry supply curve is always flatter than the short-run industry supply flatter than the short-run industry supply curvecurve

• WHY????WHY????• The reason is entry and exit – a high price The reason is entry and exit – a high price

caused by an increase in demand attracts caused by an increase in demand attracts entry by new producers, resulting in a rise in entry by new producers, resulting in a rise in industry output and an eventual fall in priceindustry output and an eventual fall in price

The Cost of Production & The Cost of Production & Efficiency in Long-Run EquilibriumEfficiency in Long-Run Equilibrium• Three conclusions about cost of production and Three conclusions about cost of production and

efficiency in the long-run equilibrium of a efficiency in the long-run equilibrium of a perfectly competitive industry:perfectly competitive industry:

1.1. in a perfectly competitive industry in in a perfectly competitive industry in equilibrium, value of marginal cost is the same equilibrium, value of marginal cost is the same for all firmsfor all firms– WHY?WHY?– All firms produce the quantity of output at which All firms produce the quantity of output at which

MC equals the market price and as price-takers, all MC equals the market price and as price-takers, all face the same market priceface the same market price

The Cost of Production & The Cost of Production & Efficiency in Long-Run EquilibriumEfficiency in Long-Run Equilibrium2.2. In a perfectly competitive industry with In a perfectly competitive industry with

free entry and exit, each firm will have free entry and exit, each firm will have zero economic profit in long-run zero economic profit in long-run equilibriumequilibrium– Firms produce the quantity of output that Firms produce the quantity of output that

minimizes its ATCminimizes its ATC– TC of production of the industry’s output is TC of production of the industry’s output is

minimized in a perfectly competitive minimized in a perfectly competitive industryindustry

The Cost of Production & The Cost of Production & Efficiency in Long-Run EquilibriumEfficiency in Long-Run Equilibrium3.3. Long-run market equilibrium of a Long-run market equilibrium of a

perfectly competitive industry is perfectly competitive industry is efficient: no mutually beneficial efficient: no mutually beneficial transactions go unexploitedtransactions go unexploited– WHY?WHY?– All consumers have a willingness to pay All consumers have a willingness to pay

greater than or equal to sellers’ cost greater than or equal to sellers’ cost actually get the goodactually get the good

The Cost of Production & The Cost of Production & Efficiency in Long-Run EquilibriumEfficiency in Long-Run Equilibrium• In the long-run equilibrium of a perfectly In the long-run equilibrium of a perfectly

competitive industry, production is efficient: competitive industry, production is efficient: costs are minimized and no resources are costs are minimized and no resources are wastedwasted

• Allocation of goods to consumers is efficient: Allocation of goods to consumers is efficient: every consumer willing to pay the cost of every consumer willing to pay the cost of producing a unit of the good gets itproducing a unit of the good gets it

The Industry Supply The Industry Supply Curve NotesCurve Notes

Industry Supply CurveIndustry Supply Curve

• Industry Supply Curve isIndustry Supply Curve is

• Up to this point, was called the supply Up to this point, was called the supply curve or the market supply curvecurve or the market supply curve

The Short-Run Market EquilibriumThe Short-Run Market Equilibrium

7006005004003002000

$26

22

18

14

10

D

Short-run industry supply curve, S

EMKT

Shut-down price

Price, cost of bushel

Quantity of tomatoes (bushels)

Market price


• All leads to the short-run industry All leads to the short-run industry supply curvesupply curve

• This curve shows how theThis curve shows how the


• EEMKTMKT is the short-run market equilibrium is the short-run market equilibrium

where the where the


• New producers will enter the industry New producers will enter the industry whenever existing producers are whenever existing producers are making a profit – whenever the market making a profit – whenever the market price is above the break-=even price of price is above the break-=even price of $14 a bushel$14 a bushel

• If the new firms enter the industry, the If the new firms enter the industry, the quantity supplied at any given price will quantity supplied at any given price will increaseincrease


• The EMKT had a equilibrium market price of $18 and a The EMKT had a equilibrium market price of $18 and a quantity of 500 bushels. At this price, existing quantity of 500 bushels. At this price, existing producers are profitableproducers are profitable

• The existing firm makes a totalThe existing firm makes a totalProfit shown by the A rectangle Profit shown by the A rectangle when the market price is $18when the market price is $18• These profits will induce new These profits will induce new producers to enter the industry, producers to enter the industry, shifting the short-run industry supply curve to theshifting the short-run industry supply curve to therightright


• The effect of the new producers on the The effect of the new producers on the existing farm is a fall in price causes it to existing farm is a fall in price causes it to reduce its output and its profits fall to the reduce its output and its profits fall to the rectangle Brectangle B

• The profit of the existing firms is diminishing The profit of the existing firms is diminishing to DMKT but this also means that the to DMKT but this also means that the numbers of firms will continue to risenumbers of firms will continue to rise

Long-Run Industry Supply CurveLong-Run Industry Supply Curve• EMKT and DMKT and CMKT is a short-run EMKT and DMKT and CMKT is a short-run

equilibriumequilibrium• Since the price of $14 is each firm’s break-even Since the price of $14 is each firm’s break-even

price, an existing producer makes zero profit, price, an existing producer makes zero profit,

• CMKT = long-run market equilibrium which is CMKT = long-run market equilibrium which is when the quantity supplied equals the quantity when the quantity supplied equals the quantity demanded, given that sufficient time has demanded, given that sufficient time has elapsed for entry into and exit from the industry elapsed for entry into and exit from the industry to occurto occur


• In the long-run market equilibrium, In the long-run market equilibrium,

The Effect of an Increase in Demand in the The Effect of an Increase in Demand in the Short Run and the Long RunShort Run and the Long Run

MC

ATC

X

Y

0 0 0

$18

14

Quantity

MC

ATC

Z

Y

Price

S1

D1

D2

S2

YMKT

XMKT

ZMKT

LRS

QXQY QZ

(a) Existing Firm Response to Increase in Demand

(b) Short-Run and Long-Run Market Response to Increase in Demand

(a) Existing Firm Response to New Entrants

Price, cost

Price, cost

Quantity Quantity


• The LRS line that passes through XMKT and The LRS line that passes through XMKT and ZMKT is the long-run industry supply curveZMKT is the long-run industry supply curve

• In the example, the long-run industry supply In the example, the long-run industry supply curve is horizontal at $14 – what does this curve is horizontal at $14 – what does this say about its elasticity?say about its elasticity?

Long-Run Industry Supply CurveLong-Run Industry Supply Curve• __________________!__________________!• In the example, the industry supply is In the example, the industry supply is

perfectly elastic in the long runperfectly elastic in the long run• Perfectly elastic long-run supply is Perfectly elastic long-run supply is

actually an assumption for many actually an assumption for many industries—it shows constant costs industries—it shows constant costs across the industryacross the industry


• Example of these industries: agriculture or Example of these industries: agriculture or bakeriesbakeries

• When industry expands…..price of that input When industry expands…..price of that input is driven upis driven up

• Consequently, later entrants in the industry Consequently, later entrants in the industry find that they have a higher cost structure find that they have a higher cost structure than early entrantsthan early entrants


• Regardless of if long-run industry supply Regardless of if long-run industry supply curve is horizontal or upward sloping or curve is horizontal or upward sloping or even downward sloping, the long-run even downward sloping, the long-run price elasticity of supply is HIGHER than price elasticity of supply is HIGHER than the short-run elasticity whenever there the short-run elasticity whenever there is free entry and exitis free entry and exit


• Long-run industry supply curve is always Long-run industry supply curve is always flatter than the short-run industry supply flatter than the short-run industry supply curvecurve

• WHY????WHY????• The reason is entry and exit – The reason is entry and exit –

The Cost of Production & The Cost of Production & Efficiency in Long-Run EquilibriumEfficiency in Long-Run Equilibrium• Three conclusions about cost of production Three conclusions about cost of production

and efficiency in the long-run equilibrium of a and efficiency in the long-run equilibrium of a perfectly competitive industry:perfectly competitive industry:

1.1. in a perfectly competitive industry in in a perfectly competitive industry in equilibrium, value of marginal cost is the equilibrium, value of marginal cost is the same for all firmssame for all firms

The Cost of Production & The Cost of Production & Efficiency in Long-Run EquilibriumEfficiency in Long-Run Equilibrium2.2. In a perfectly competitive industry with free In a perfectly competitive industry with free

entry and exit, each firm will have zero entry and exit, each firm will have zero economic profit in long-run equilibriumeconomic profit in long-run equilibrium

The Cost of Production & The Cost of Production & Efficiency in Long-Run EquilibriumEfficiency in Long-Run Equilibrium3.3. Long-run market equilibrium of a perfectly Long-run market equilibrium of a perfectly

competitive industry is efficient: no competitive industry is efficient: no mutually beneficial transactions go mutually beneficial transactions go unexploitedunexploited

The Cost of Production & The Cost of Production & Efficiency in Long-Run EquilibriumEfficiency in Long-Run Equilibrium• In the long-run equilibrium of a perfectly In the long-run equilibrium of a perfectly

competitive industry, production is efficient:competitive industry, production is efficient:

• Allocation of goods to consumers is efficient: Allocation of goods to consumers is efficient: every consumer willing to pay the cost of every consumer willing to pay the cost of producing a unit of the good gets itproducing a unit of the good gets it

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