Supply From A Competitive Industry
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1 23 Industr Sul
2 Sul From A Cometitive Industr How are the sul decisions of the man individual firms in a cometitive industr to be combined to discover the market sul curve for the entire industr?
3 Sul From A Cometitive Industr Since ever firm in the industr is a ricetaker, total quantit sulied at a given rice is the sum of quantities sulied at that rice b the individual firms.
4 Short-Run Sul In a short-run the number of firms in the industr is, temoraril, fixed. Let n be the number of firms; i = 1,,n. S i () is firm i s sul function.
5 Short-Run Sul In a short-run the number of firms in the industr is, temoraril, fixed. Let n be the number of firms; i = 1,,n. S i () is firm i s sul function. The industr s short-run sul function is S() S i (). n i 1
6 Sul From A Cometitive Industr Firm 1 s Sul Firm 2 s Sul S 1 () S 2 ()
7 Sul From A Cometitive Industr Firm 1 s Sul Firm 2 s Sul S 1 ( ) S 1 () S 2 () S 1 ( ) Industr s Sul S() = S 1 () + S 2 ()
8 Sul From A Cometitive Industr Firm 1 s Sul Firm 2 s Sul S 1 ( ) S 1 () S 2 ( ) S 2 () S 1 ( )+S 2 ( ) Industr s Sul S() = S 1 () + S 2 ()
9 Sul From A Cometitive Industr Firm 1 s Sul Firm 2 s Sul S 1 () S 2 () Industr s Sul S() = S 1 () + S 2 ()
10 Short-Run Industr Equilibrium In a short-run, neither entr nor exit can occur. Consequentl, in a short-run equilibrium, some firms ma earn ositive economics rofits, others ma suffer economic losses, and still others ma earn zero economic rofit.
11 Short-Run Industr Equilibrium s e Short-run industr sul Market demand Y s e Short-run equilibrium rice clears the market and is taken as given b each firm. Y
12 Short-Run Industr Equilibrium Firm 1 Firm 2 Firm 3 s e AC s AC MC AC s s s MC MC s s * 1 1 * 2 2 * 3 3
13 Short-Run Industr Equilibrium Firm 1 Firm 2 Firm 3 s e AC s AC MC AC s s s MC MC s s P 1 > 0 P 2 < 0 P 3 = 0 * 1 1 * 2 2 * 3 3
14 Short-Run Industr Equilibrium Firm 1 Firm 2 Firm 3 s e AC s AC MC AC s s s MC MC s s P 1 > 0 P 2 < 0 P 3 = 0 * 1 1 * 2 2 * 3 3 Firm 1 wishes Firm 2 wishes Firm 3 is to remain in to exit from indifferent. the industr. the industr.
15 Long-Run Industr Sul In the long-run ever firm now in the industr is free to exit and firms now outside the industr are free to enter. The industr s long-run sul function must account for entr and exit as well as for the sul choices of firms that choose to be in the industr. How is this done?
16 Long-Run Industr Sul Positive economic rofit induces entr. Economic rofit is ositive when the market rice s e is higher than a firm s minimum av. total cost; s e > min AC(). Entr increases industr sul, causing s e to fall. When does entr cease?
17 Long-Run Industr Sul The Market Mkt. Demand S 2 () Mkt. Sul A Tical Firm MC() AC() Y Suose the industr initiall contains onl two firms.
18 Long-Run Industr Sul The Market Mkt. Demand S 2 () A Tical Firm MC() AC() 2 2 Y Then the market-clearing rice is 2.
19 Long-Run Industr Sul The Market Mkt. Demand S 2 () A Tical Firm MC() AC() 2 2 Y 2 * Then the market-clearing rice is 2. Each firm roduces 2 * units of outut.
20 Long-Run Industr Sul The Market Mkt. Demand S 2 () A Tical Firm MC() AC() 2 2 P > 0 Y 2 * Each firm makes a ositive economic rofit, inducing entr b another firm.
21 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () 2 2 A Tical Firm MC() AC() Market sul shifts outwards. Y 2 *
22 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () 2 2 A Tical Firm MC() AC() Market sul shifts outwards. Market rice falls. Y 2 *
23 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () A Tical Firm MC() AC() 3 3 Each firm roduces less. Y 3 *
24 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () A Tical Firm MC() AC() 3 3 P > 0 Y 3 * Each firm roduces less. Each firm s economic rofit is reduced.
25 Long-Run Industr Sul The Market Mkt. Demand S 3 () A Tical Firm MC() AC() 3 3 P > 0 Y 3 * Each firm s economic rofit is ositive. Will another firm enter?
26 3 Long-Run Industr Sul The Market Mkt. Demand S 3 () S 4 () 3 A Tical Firm MC() AC() Y 3 * Market sul would shift outwards again.
27 3 Long-Run Industr Sul The Market Mkt. Demand S 3 () S 4 () 3 A Tical Firm MC() AC() Y 3 * Market sul would shift outwards again. Market rice would fall again.
28 4 Long-Run Industr Sul The Market Mkt. Demand S 3 () S 4 () 4 A Tical Firm MC() AC() Y 4 * Each firm would roduce less again.
29 Long-Run Industr Sul The Market Mkt. Demand S 3 () S 4 () A Tical Firm MC() AC() 4 4 P < 0 Y 4 * Each firm would roduce less again. Each firm s economic rofit would be negative.
30 Long-Run Industr Sul The Market Mkt. Demand S 3 () S 4 () A Tical Firm MC() AC() 4 4 P < 0 Y 4 * Each firm would roduce less again. Each firm s economic rofit would be negative. So the fourth firm would not enter.
31 Long-Run Industr Sul The long-run number of firms in the industr is the largest number for which the market rice is at least as large as min AC(). Now we can construct the industr s long-run sul curve.
32 Long-Run Industr Sul Suose that market demand is large enough to sustain onl two firms in the industr.
33 2 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () A Tical Firm MC() AC() 2 Y 2 *
34 Long-Run Industr Sul Suose that market demand is large enough to sustain onl two firms in the industr. Then market demand increases, the market rice rises, each firm roduces more, and earns a higher economic rofit.
35 2 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () A Tical Firm MC() AC() 2 Y 2 *
36 2 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () A Tical Firm MC() AC() 2 Y 2 *
37 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () A Tical Firm MC() AC() 2 2 Y 2 *
38 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () A Tical Firm MC() AC() 2 2 Y 2 * Notice that a 3rd firm will not enter since it would earn negative economic rofits.
39 Long-Run Industr Sul As market demand increases further, the market rice rises further, the two incumbent firms each roduce more and earn still higher economic rofits -- until a 3rd firm becomes indifferent between entering and staing out.
40 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () A Tical Firm MC() AC() 2 2 Y 2 *
41 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () 2 2 A Tical Firm MC() AC() Y 2 *
42 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () 2 2 A Tical Firm MC() AC() Y 2 * A third firm can now enter, causing all firms to earn zero economic rofits.
43 Long-Run Industr Sul So an further increase in market demand will cause the number of firms in the industr to rise to three.
44 Long-Run Industr Sul The Market Mkt. Demand S 2 () S 3 () 2 2 A Tical Firm MC() AC() Y 2 * The onl relevant art of the short-run sul curve for n = 2 firms in the industr.
45 Long-Run Industr Sul How much further can market demand increase before a fourth firm enters the industr?
46 3 Long-Run Industr Sul The Market Mkt. Demand S 3 () S 4 () 3 A Tical Firm MC() AC() Y 3 *
47 3 Long-Run Industr Sul The Market Mkt. Demand S 3 () S 4 () 3 A Tical Firm MC() AC() Y 3 * A 4th firm would now earn negative economic rofits if it entered the industr.
48 Long-Run Industr Sul The Market Mkt. Demand A Tical Firm MC() AC() S 3 () S 4 () 3 3 Y 3 * But now a 4th firm would earn zero economic rofit if it entered the industr.
49 Long-Run Industr Sul The Market Mkt. Demand S 3 () S 4 () 3 3 A Tical Firm MC() AC() Y 3 * The onl relevant art of the short-run sul curve for n = 3 firms in the industr.
50 Long-Run Industr Sul Continuing in this manner builds the industr s long-run sul curve, one section at-a-time from successive short-run industr sul curves.
51 Long-Run Industr Sul The Market Long-Run Sul Curve A Tical Firm MC() AC() Y 3 *
52 Long-Run Industr Sul The Market Long-Run Sul Curve A Tical Firm MC() AC() Y 3 * Notice that the bottom of each segment of the sul curve is min AC().
53 Long-Run Industr Sul As each firm gets smaller relative to the industr, the long-run industr sul curve aroaches a horizontal line at the height of min AC().
54 Long-Run Industr Sul The Market Long-Run Sul Curve A Tical Firm MC() AC() Y 3 * Notice that the bottom of each segment of the sul curve is min AC().
55 Long-Run Industr Sul The Market Long-Run Sul Curve A Tical Firm MC() AC() Y * The bottom of each segment of the sul curve is min AC(). As firms get smaller the segments get shorter.
56 Long-Run Industr Sul The Market Long-Run Sul Curve A Tical Firm MC() AC() Y * In the limit, as firms become infinitesimall small, the industr s long-run sul curve is horizontal at min AC().
57 Long-Run Market Equilibrium Price In the long-run market equilibrium, the market rice is determined solel b the longrun minimum average roduction cost. Long-run market rice is e min AC( ). 0
58 Long-Run Imlications for Taxation In a short-run equilibrium, the burden of a sales or an excise tax is ticall shared b both buers and sellers, tax incidence of the tax deending uon the own-rice elasticities of demand and sul. Q: Is this true in a long-run market equilibrium?
59 Long-Run Imlications for Taxation Mkt. demand e LR sul (no tax) Q e X,Y
60 Long-Run Imlications for Taxation Mkt. demand b = e +t s = e t LR sul (with tax) LR sul (no tax) Q t Q e X,Y
61 Long-Run Imlications for Taxation Mkt. demand In the long-run the buers a all of a sales or an excise tax. b = e +t s = e t LR sul (with tax) LR sul (no tax) Q t Q e X,Y
62 Fixed Inuts and Economic Rent What if there is a barriers to entr or exit? E.g., the taxi-cab industr has a barrier to entr even though there are lots of cabs cometing with each other. Liquor licensing is a barrier to entr into a cometitive industr.
63 Fixed Inuts and Economic Rent Q: When there is a barrier to entr, will not the firms alread in the industr make ositive economic rofits?
64 Fixed Inuts and Economic Rent Q: When there is a barrier to entr, will not the firms alread in the industr make ositive economic rofits? A: No. Each firm in the industr makes a zero economic rofit. Wh?
65 Fixed Inuts and Economic Rent An inut (e.g. an oerating license) that is fixed in the long-run causes a long-run fixed cost, F. Long-run total cost, c() = F + c v (). And long-run average total cost, AC() = AFC() + AVC(). In the long-run equilibrium, what will be the value of F?
66 Fixed Inuts and Economic Rent Think of a firm that needs an oerating license -- the license is a fixed inut that is rented but not owned b the firm. If the firm makes a ositive economic rofit then another firm can offer the license owner a higher rice for it. In this wa, all firms economic rofits are cometed awa, to zero.
67 Fixed Inuts and Economic Rent So in the long-run equilibrium, each firm makes a zero economic rofit and each firm s fixed cost is its ament for its oerating license.
68 Fixed Inuts and Economic Rent $/outut unit e MC() * AC() AVC() The firm s economic rofit is zero.
69 Fixed Inuts and Economic Rent $/outut unit MC() AC() AVC() e F The firm s economic rofit is zero. * F is the ament to the owner of the fixed inut (the license).
70 Fixed Inuts and Economic Rent Economic rent is the ament for an inut that is in excess of the minimum ament required to have that inut sulied. Each license essentiall costs zero to sul, so the long-run economic rent aid to the license owner is the firm s long-run fixed cost.
71 Fixed Inuts and Economic Rent $/outut unit MC() AC() AVC() e F The firm s economic rofit is zero. * F is the ament to the owner of the fixed inut (the license); F = economic rent.
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