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2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 11
Module 60

4. What You Will Learn in this Module
Explain why industry behavior differs in the short run and the long run
Discuss what determines the industry supply curve in both the short run and the long run
Section 11 | Module 60

5. The Short-Run Individual Supply Curve
Section 11 | Module 60

6. Industry Supply Curve
The industry supply curve shows the relationship between the price of a good and the total output of the industry as a whole.
The short-run industry supply curve shows how the quantity supplied by an industry depends on the market price given a fixed number of producers.
There is a short-run market equilibrium when the quantity supplied equals the quantity demanded, taking the number of producers as given.
Section 11 | Module 60

7. The Short-Run Market Equilibrium
Section 11 | Module 60

8. The Long-Run Industry Supply Curve
A market is in long-run market equilibrium when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur.
Section 11 | Module 60

9. The Long-Run Market Equilibrium
Section 11 | Module 60

10. The Effect of an Increase in Demand in the Short Run and the Long Run for a Constant-Cost Industry
Section 11 | Module 60

11. The Effect of an Increase in Demand in the Short Run and the Long Run for an Increasing-Cost Industry
Section 11 | Module 60

12. The Effect of an Increase in Demand in the Short Run and the Long Run for a Decreasing-Cost Industry
Section 11 | Module 60

13. Comparing the Short-Run and Long-Run Industry Supply Curves
Section 11 | Module 60

14. The Cost of Production and Efficiency in the Long-Run Equilibrium
In a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms.
In a perfectly competitive industry with free entry and exit, each firm will have zero economic profits in long-run equilibrium.
The long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited.
Section 11 | Module 60

15. F Y I
A Crushing Reversal
Starting in the mid-1990s, Americans began drinking a lot more wine.
At first, the increase in wine demand led to sharply higher prices.
As a result, there was a rapid expansion of the industry.
The result was predictable: the price of grapes fell as the supply curve shifted out.
As demand growth slowed in 2002, prices plunged by 17%.
The effect was to end the California wine industry’s expansion
Section 11 | Module 60

16. Summary The industry supply curve depends on the time period.
The short-run industry supply curve is the industry supply curve given that the number of firms is fixed.
The short-run market equilibrium is given by the intersection of the short-run industry supply curve and the demand curve.
The long-run industry supply curve is the industry supply curve given sufficient time for entry into and exit from the industry.
In the long-run market equilibrium—given by the intersection of the long-run industry supply curve and the demand curve—no producer has an incentive to enter or exit.
Section 11 | Module 60

17. Summary
The long-run industry supply curve is often horizontal. It may slope upward if there is limited supply of an input. It is always more elastic than the short-run industry supply curve.
In the long-run market equilibrium of a competitive industry, profit maximization leads each firm to produce at the same marginal cost, which is equal to market price.
Free entry and exit means that each firm earns zero economic profit—producing the output corresponding to its minimum average total cost. So the total cost of production of an industry’s output is minimized.
The outcome is efficient because every consumer with a willingness to pay greater than or equal to marginal cost gets the good.
Section 11 | Module 60