Chapter 23 Industry Supply

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

23.1 Short-Run Industry Supply

23.2 Industry Equilibrium in the Short Run The profits can be positive, zero, or negative.

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.

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.

23.3 Industry Equilibrium in the Long Run Firms enter until the profit margin vanishes.

23.4 The Long-Run Supply Curve Eliminating portions of the supply curves that can never be intersections with a market demand curve

23.4 The Long-Run Supply Curve The long-run industry supply curve gets increasingly flatter

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.

EXAMPLE: Taxation in the short run and long run The tax burden is shifted to the consumers in the long run.

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.

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.

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.

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