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 S1+S2 y
23.2 Industry Equilibrium in the Short Run Positive profits MC AC P* AVC y
23.2 Industry Equilibrium in the Short Run Zero profits MC AC AVC P* y
23.2 Industry Equilibrium in the Short Run Negative profits but stays in business MC AC AVC P* y
23.2 Industry Equilibrium in the Short Run Shutting down MC AC AVC P* y
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 The long-run supply curve. LMC LAC y
23.3 Industry Equilibrium in the Long Run Industry supply with multiple firms S3 S4 S1 S2 P* y
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 Three firms: positive profits S3 S4 S1 S2 P’ P* D y
23.3 Industry Equilibrium in the Long Run Four firms: no equilibrium, one firm has to exit. S3 S4 S1 S2 P* D y
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
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
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 Tax sharing in the short run. Shifted short-run supply p short-run supply pd p* ps demand y
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
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.