The Industry Supply Curve

1. The Industry Supply Curve

2. Industry Supply Curve • Industry Supply Curve is the relationship between price and the total output of an industry as a whole • Up to this point, was called the supply curve or the market supply curve

3. Short-Run Industry Supply Curve • Jennifer and Jason’s farm is producing organic tomatoes and assume there are 100 organic tomatoes farms and they all have the same costs as Jennifer and Jason

4. The Short-Run Market Equilibrium All 100 farms has the same individual short-run supply curve. At the price below $10, no farms will produce. Price, cost of bushel Short-run industry supply curve, S $26 22 E MKT Market price 18 D 14 Shut-down price 10 At a price of more than $10, each farm will produce the quantity of output at which its marginal cost is equal to the market price. Each farm will produce 4 bushels if the price is $14, at 5 bushels the price is…..6 bushels…… 0 200 300 400 500 600 700 Quantity of tomatoes (bushels)

5. Short-Run Industry Supply Curve • All leads to the short-run industry supply curve • This curve shows how the quantitative supplied by an industry depends on the market price given by a fixed number of producers

6. Short-Run Industry Supply Curve • EMKT is the short-run market equilibrium where the quantity supplied equals the Quantity demanded, taking the number of producers as given

7. Long-Run Industry Supply Curve • New producers will enter the industry whenever existing producers are making a profit – whenever the market price is above the break-=even price of $14 a bushel • If the new firms enter the industry, the quantity supplied at any given price will increase

8. Long-Run Industry Supply Curve • The EMKT had a equilibrium market price of $18 and a quantity of 500 bushels. At this price, existing producers are profitable • The existing firm makes a total Profit shown by the A rectangle when the market price is $18 • These profits will induce new producers to enter the industry, shifting the short-run industry supply curve to the right

9. Long-Run Industry Supply Curve • The effect of the new producers on the existing farm is a fall in price causes it to reduce its output and its profits fall to the rectangle B • The profit of the existing firms is diminishing to DMKT but this also means that the numbers of firms will continue to rise

10. Long-Run Industry Supply Curve • EMKT and DMKT and CMKT is a short-run equilibrium • Since the price of $14 is each firm’s break-even price, an existing producer makes zero profit, earning only opportunity cost of the resource used in production • CMKT = long-run market equilibrium which is when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

11. Long-Run Industry Supply Curve • In the long-run market equilibrium, all existing and potential producer have fully adjusted to their optimal long-run choices, as a result, no producer has an incentive to either enter or exit the industry

12. The Effect of an Increase in Demand in the Short Run and the Long Run (b) Short-Run and Long-Run Market Response to Increase in Demand (a) Existing Firm Response to New Entrants (a) Existing Firm Response to Increase in Demand Price, cost Price Price, cost Long-run industry supply curve, Higher industry output from new entrants drive price and profit back down. An increase in demand raises price and profit. LRS S S MC 1 2 MC $18 Y A T C A T C Y Y MKT 14 X Z D Z X 2 MKT MKT D 1 0 0 Q Q Q 0 Quantity Quantity Quantity X Y Z Increase in output from new entrants

13. Long-Run Industry Supply Curve • The LRS line that passes through XMKT and ZMKT is the long-run industry supply curve • Shows how the quantity supplied by an industry responds to the price given that producers have had time to enter or exit the industry • In the example, the long-run industry supply curve is horizontal at $14 – what does this say about its elasticity?

14. Long-Run Industry Supply Curve • Perfectly elastic! • In the example, the industry supply is perfectly elastic in the long run • Perfectly elastic long-run supply is actually an assumption for many industries—it shows constant costs across the industry • Each firm (regardless of it being an incumbent or a new entrant) faces the same cost structure

15. Long-Run Industry Supply Curve • Example of these industries: agriculture or bakeries • Use some product that is in limited supply (inelastically supplied) • When industry expands…..price of that input is driven up • Consequently, later entrants in the industry find that they have a higher cost structure than early entrants • Example: beachfront resort hotels

16. Long-Run Industry Supply Curve • Regardless of if long-run industry supply curve is horizontal or upward sloping or even downward sloping, the long-run price elasticity of supply is HIGHER than the short-run elasticity whenever there is free entry and exit

17. Long-Run Industry Supply Curve • Long-run industry supply curve is always flatter than the short-run industry supply curve • WHY???? • The reason is entry and exit – a high price caused by an increase in demand attracts entry by new producers, resulting in a rise in industry output and an eventual fall in price

18. The Cost of Production & Efficiency in Long-Run Equilibrium • Three conclusions about cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry: • in a perfectly competitive industry in equilibrium, value of marginal cost is the same for all firms • WHY? • All firms produce the quantity of output at which MC equals the market price and as price-takers, all face the same market price

19. The Cost of Production & Efficiency in Long-Run Equilibrium • In a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in long-run equilibrium • Firms produce the quantity of output that minimizes its ATC • TC of production of the industry’s output is minimized in a perfectly competitive industry

20. The Cost of Production & Efficiency in Long-Run Equilibrium • Long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited • WHY? • All consumers have a willingness to pay greater than or equal to sellers’ cost actually get the good

21. The Cost of Production & Efficiency in Long-Run Equilibrium • In the long-run equilibrium of a perfectly competitive industry, production is efficient: costs are minimized and no resources are wasted • Allocation of goods to consumers is efficient: every consumer willing to pay the cost of producing a unit of the good gets it

22. The Industry Supply Curve Notes

23. Industry Supply Curve • Industry Supply Curve is • Up to this point, was called the supply curve or the market supply curve

24. The Short-Run Market Equilibrium Price, cost of bushel Short-run industry supply curve, S $26 22 E MKT Market price 18 D 14 Shut-down price 10 0 200 300 400 500 600 700 Quantity of tomatoes (bushels)

25. Short-Run Industry Supply Curve • All leads to the short-run industry supply curve • This curve shows how the

26. Short-Run Industry Supply Curve • EMKT is the short-run market equilibrium where the

27. Long-Run Industry Supply Curve • New producers will enter the industry whenever existing producers are making a profit – whenever the market price is above the break-=even price of $14 a bushel • If the new firms enter the industry, the quantity supplied at any given price will increase

28. Long-Run Industry Supply Curve • The EMKT had a equilibrium market price of $18 and a quantity of 500 bushels. At this price, existing producers are profitable • The existing firm makes a total Profit shown by the A rectangle when the market price is $18 • These profits will induce new producers to enter the industry, shifting the short-run industry supply curve to the right

29. Long-Run Industry Supply Curve • The effect of the new producers on the existing farm is a fall in price causes it to reduce its output and its profits fall to the rectangle B • The profit of the existing firms is diminishing to DMKT but this also means that the numbers of firms will continue to rise

30. Long-Run Industry Supply Curve • EMKT and DMKT and CMKT is a short-run equilibrium • Since the price of $14 is each firm’s break-even price, an existing producer makes zero profit, • CMKT = long-run market equilibrium which is when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur

31. Long-Run Industry Supply Curve • In the long-run market equilibrium,

32. The Effect of an Increase in Demand in the Short Run and the Long Run (b) Short-Run and Long-Run Market Response to Increase in Demand (a) Existing Firm Response to New Entrants (a) Existing Firm Response to Increase in Demand Price, cost Price Price, cost LRS S S MC 1 2 MC $18 Y A T C A T C Y Y MKT 14 X Z D Z X 2 MKT MKT D 1 0 0 Q Q Q 0 Quantity Quantity Quantity X Y Z

33. Long-Run Industry Supply Curve • The LRS line that passes through XMKT and ZMKT is the long-run industry supply curve • In the example, the long-run industry supply curve is horizontal at $14 – what does this say about its elasticity?

34. Long-Run Industry Supply Curve • __________________! • In the example, the industry supply is perfectly elastic in the long run • Perfectly elastic long-run supply is actually an assumption for many industries—it shows constant costs across the industry

35. Long-Run Industry Supply Curve • Example of these industries: agriculture or bakeries • When industry expands…..price of that input is driven up • Consequently, later entrants in the industry find that they have a higher cost structure than early entrants

36. Long-Run Industry Supply Curve • Regardless of if long-run industry supply curve is horizontal or upward sloping or even downward sloping, the long-run price elasticity of supply is HIGHER than the short-run elasticity whenever there is free entry and exit

37. Long-Run Industry Supply Curve • Long-run industry supply curve is always flatter than the short-run industry supply curve • WHY???? • The reason is entry and exit –

38. The Cost of Production & Efficiency in Long-Run Equilibrium • Three conclusions about cost of production and efficiency in the long-run equilibrium of a perfectly competitive industry: • in a perfectly competitive industry in equilibrium, value of marginal cost is the same for all firms

39. The Cost of Production & Efficiency in Long-Run Equilibrium • In a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in long-run equilibrium

40. The Cost of Production & Efficiency in Long-Run Equilibrium • Long-run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited

41. The Cost of Production & Efficiency in Long-Run Equilibrium • In the long-run equilibrium of a perfectly competitive industry, production is efficient: • Allocation of goods to consumers is efficient: every consumer willing to pay the cost of producing a unit of the good gets it