Supply From A Competitive Industry

Transcription

1 Industry Suly

2 Suly From A Cometitive Industry How are the suly decisions of the many individual firms in a cometitive industry to be combined to discover the market suly curve for the entire industry?

3 Suly From A Cometitive Industry Since every firm in the industry is a rice-taker, total quantity sulied at a given rice is the sum of quantities sulied at that rice by the individual firms.

4 Short-Run Suly In a short-run the number of firms in the industry is, temorarily, fixed. Let n be the number of firms; i = 1,,n. S i () is firm i s suly function.

5 Short-Run Suly In a short-run the number of firms in the industry is, temorarily, fixed. Let n be the number of firms; i = 1,,n. S i () is firm i s suly function. The industry s short-run suly function is n S( ) Si( ). i 1

6 Suly From A Cometitive Industry Firm 1 s Suly Firm 2 s Suly S 1 () S 2 ()

7 Suly From A Cometitive Industry Firm 1 s Suly Firm 2 s Suly S 1 ( ) S 1 () S 2 () S 1 ( ) Industry s Suly S() = S 1 () + S 2 ()

8 Suly From A Cometitive Industry Firm 1 s Suly Firm 2 s Suly S 1 ( ) S 1 () S 2 ( ) S 2 () S 1 ( )+S 2 ( ) Industry s Suly S() = S 1 () + S 2 ()

9 Short-Run Industry Equilibrium In a short-run, neither entry nor exit can occur. Consequently, in a short-run equilibrium, some firms may earn ositive economics rofits, others may suffer economic losses, and still others may earn zero economic rofit.

10 Short-Run Industry Equilibrium s e Short-run industry suly Market demand Q s e Short-run equilibrium rice clears the market and is taken as given by each firm. Q

11 Short-Run Industry Equilibrium Firm 1 Firm 2 Firm 3 s e AC s AC MC AC s s s MC MC s s q * 1 q 1 q * 2 q 2 q * 3 q 3

12 Short-Run Industry 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 q * 1 q 1 q * 2 q 2 q * 3 q 3 Firm 1 wishes Firm 2 wishes Firm 3 is to remain in to exit from indifferent. the industry. the industry.

13 Long-Run Industry Suly In the long-run every firm now in the industry is free to exit and firms now outside the industry are free to enter. The industry s long-run suly function must account for entry and exit as well as for the suly choices of firms that choose to be in the industry. How is this done?

14 Long-Run Industry Suly Positive economic rofit induces entry. Economic rofit is ositive when the market rice s e is higher than a firm s minimum av. total cost; s e > min AC(q). Entry increases industry suly, causing s e to fall. When does entry cease?

15 Long-Run Industry Suly The Market Mkt. Demand S 2 () A Tyical Firm MC(q) AC(q) Mkt. Suly Q Suose the industry initially contains only two firms. q

16 Long-Run Industry Suly The Market Mkt. Demand S 2 () A Tyical Firm MC(q) AC(q) 2 2 Q q 2 * Then the market-clearing rice is 2. Each firm roduces q 2 * units of outut. q

17 Long-Run Industry Suly The Market Mkt. Demand S 2 () A Tyical Firm MC(q) AC(q) 2 2 P > 0 Q q 2 * Each firm makes a ositive economic rofit, inducing entry by another firm. q

18 Long-Run Industry Suly The Market Mkt. Demand S 2 () S 3 () 2 2 A Tyical Firm MC(q) AC(q) Market suly shifts outwards. Q q 2 * q

19 Long-Run Industry Suly The Market Mkt. Demand S 2 () S 3 () 2 2 A Tyical Firm MC(q) AC(q) Market suly shifts outwards. Market rice falls. Q q 2 * q

20 Long-Run Industry Suly The Market Mkt. Demand S 2 () A Tyical Firm MC(q) AC(q) S 3 () 3 3 P > 0 Q q 3 * Each firm roduces less. Each firm s economic rofit is reduced. q

21 Long-Run Industry Suly The Market Mkt. Demand A Tyical Firm MC(q) AC(q) S 3 () 3 3 P > 0 Q q 3 * Each firm s economic rofit is ositive. Will another firm enter? q

22 Long-Run Industry Suly The Market Mkt. Demand A Tyical Firm MC(q) AC(q) 3 S 3 () S 4 () 3 Q q 3 * Market suly would shift outwards again. q

23 Long-Run Industry Suly The Market Mkt. Demand A Tyical Firm MC(q) AC(q) S 3 () S 4 () 4 4 P < 0 Q q 4 * Each firm would roduce less again. Each firm s economic rofit would be negative. So the fourth firm would not enter. q

24 Long-Run Industry Suly The long-run number of firms in the industry is the largest number for which the market rice is at least as large as min AC(q). Now we can construct the industry s long-run suly curve.

25 Long-Run Industry Suly Suose that market demand is large enough to sustain only two firms in the industry.

26 Long-Run Industry Suly Suose that market demand is large enough to sustain only two firms in the industry. Then market demand increases, the market rice rises, each firm roduces more, and earns a higher economic rofit.

27 Long-Run Industry Suly The Market Mkt. Demand S 2 () A Tyical Firm MC(q) AC(q) S 3 () 2 2 Q q 2 * q

28 Long-Run Industry Suly The Market Mkt. Demand S 2 () A Tyical Firm MC(q) AC(q) S 3 () 2 2 Q q 2 * q

29 Long-Run Industry Suly The Market Mkt. Demand S 2 () A Tyical Firm MC(q) AC(q) S 3 () 2 2 Q q 2 * Notice that a 3rd firm will not enter since it would earn negative economic rofits. q

30 Long-Run Industry Suly 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 staying out.

31 Long-Run Industry Suly The Market Mkt. Demand S 2 () A Tyical Firm MC(q) AC(q) S 3 () 2 2 Q q 2 * q

32 Long-Run Industry Suly The Market Mkt. Demand S 2 () S 3 () 2 2 A Tyical Firm MC(q) AC(q) Q q 2 * q

33 Long-Run Industry Suly The Market Mkt. Demand S 2 () S 3 () 2 2 A Tyical Firm MC(q) AC(q) Q q 2 * A third firm can now enter, causing all firms to earn zero economic rofits. q

34 Long-Run Industry Suly So any further increase in market demand will cause the number of firms in the industry to rise to three.

35 Long-Run Industry Suly The Market Mkt. Demand S 2 () S 3 () 2 2 A Tyical Firm MC(q) AC(q) Q q 2 * q The only relevant art of the short-run suly curve for n = 2 firms in the industry.

36 Long-Run Industry Suly How much further can market demand increase before a fourth firm enters the industry?

37 Long-Run Industry Suly The Market Mkt. Demand A Tyical Firm MC(q) AC(q) 3 S 3 () S 4 () 3 Q q 3 * A 4th firm would now earn negative economic rofits if it entered the industry. q

38 Long-Run Industry Suly The Market Mkt. Demand S 3 () 3 S 4 () 3 A Tyical Firm MC(q) AC(q) Q q 3 * But now a 4th firm would earn zero economic rofit if it entered the industry. q

39 Long-Run Industry Suly The Market Mkt. Demand S 3 () S 4 () 3 3 A Tyical Firm MC(q) AC(q) Q q 3 * The only relevant art of the short-run suly curve for n = 3 firms in the industry. q

40 Long-Run Industry Suly Continuing in this manner builds the industry s long-run suly curve, one section at-a-time from successive short-run industry suly curves.

41 Long-Run Industry Suly The Market Long-Run Suly Curve A Tyical Firm MC(q) AC(q) Q q 3 * Notice that the bottom of each segment of the suly curve is min AC(y). q

42 Long-Run Industry Suly As each firm gets smaller relative to the industry, the long-run industry suly curve aroaches a horizontal line at the height of min AC(q).

43 Long-Run Industry Suly The Market Long-Run Suly Curve A Tyical Firm MC(q) AC(q) Q q 3 * Notice that the bottom of each segment of the suly curve is min AC(q). q

44 Long-Run Industry Suly The Market Long-Run Suly Curve A Tyical Firm MC(q) AC(q) Q q* The bottom of each segment of the suly curve is min AC(q). As firms get smaller the segments get shorter. q

45 Long-Run Industry Suly The Market Long-Run Suly Curve A Tyical Firm MC(q) AC(q) Q q* In the limit, as firms become infinitesimally small, the industry s long-run suly curve is horizontal at min AC(q). q

46 Long-Run Market Equilibrium Price In the long-run market equilibrium, the market rice is determined solely by the long-run minimum average roduction cost. Long-run market rice is e min AC( q). q 0

47 Long-Run Imlications for Taxation In a short-run equilibrium, the burden of a sales or an excise tax is tyically shared by both buyers and sellers, tax incidence of the tax deending uon the own-rice elasticities of demand and suly. Q: Is this true in a long-run market equilibrium?

48 Long-Run Imlications for Taxation Mkt. demand e LR suly (no tax) Q e

49 Long-Run Imlications for Taxation Mkt. demand In the long-run the buyers ay all of a sales or an excise tax. b = e +t s = e t LR suly (with tax) LR suly (no tax) Q t Q e

50 Fixed Inuts and Economic Rent What if there is a barriers to entry or exit? E.g., the taxi-cab industry has a barrier to entry even though there are lots of cabs cometing with each other. Liquor licensing is a barrier to entry into a cometitive industry.

51 Fixed Inuts and Economic Rent Q: When there is a barrier to entry, will not the firms already in the industry make ositive economic rofits?

52 Fixed Inuts and Economic Rent Q: When there is a barrier to entry, will not the firms already in the industry make ositive economic rofits? A: No. Each firm in the industry makes a zero economic rofit. Why?

53 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(q) = F + c v (q). And long-run average total cost, AC(q) = AFC(q) + AVC(q). In the long-run equilibrium, what will be the value of F?

54 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 by 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 way, all firms economic rofits are cometed away, to zero.

55 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 ayment for its oerating license.

56 Fixed Inuts and Economic Rent $/outut unit e MC(q) q* q AC(q) AVC(q) The firm s economic rofit is zero.

57 Fixed Inuts and Economic Rent $/outut unit MC(q) AC(q) AVC(q) e F The firm s economic rofit is zero. q* F is the ayment to the owner of the fixed inut (the license). q

58 Fixed Inuts and Economic Rent Economic rent is the ayment for an inut that is in excess of the minimum ayment required to have that inut sulied. Each license essentially costs zero to suly, so the long-run economic rent aid to the license owner is the firm s long-run fixed cost.

59 Fixed Inuts and Economic Rent $/outut unit MC(q) AC(q) AVC(q) e F The firm s economic rofit is zero. q* F is the ayment to the owner of the fixed inut (the license); F = economic rent. q