Principles of Microeconomics Lecture 20 – Industry Supply
Since every firm in the industry is a price-taker, total quantity supplied at a given price is the sum of
quantities supplied at that price by the individual firms.
In a short-run the number of firms in the industry is, temporarily, fixed.
o Let n be the number of firms;
i = 1, … ,n.
o Si(p) is firm i’s supply function.
The industry’s short-run supply function is
o
In a short-run, neither entry nor exit can occur.
Consequently, in a short-run equilibrium, some firms may earn positive economics profits, others may suffer
economic losses, and still others may earn zero economic profit.
Short-run equilibrium price clears the market and is taken as given by each firm
o
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 supply function must account for entry and exit as well as for the supply choices of
firms that choose to be in the industry.
Positive economic profit induces entry.
Economic profit is positive when the market price p se is higher than a firm’s minimum av. total cost;
pse > min AC(y).
Entry increases industry supply, causing p se to fall.
When does entry cease? When p= min AC(y)
In the long-run market equilibrium, the market price is determined solely by the long-run minimum average
production cost.
o
In the limit, as firms become infinitesimally small, the industry’s long-run supply curve is horizontal at min
AC(y).
o
In a short-run equilibrium, the burden of a sales or an excise tax is typically shared by both buyers and
sellers, tax incidence of the tax depending upon the own-price elasticities of demand and supply.
In the long-run the buyers pay all of a sales or an excise tax
Since every firm in the industry is a price-taker, total quantity supplied at a given price is the sum of
quantities supplied at that price by the individual firms.
In a short-run the number of firms in the industry is, temporarily, fixed.
o Let n be the number of firms;
i = 1, … ,n.
o Si(p) is firm i’s supply function.
The industry’s short-run supply function is
o
In a short-run, neither entry nor exit can occur.
Consequently, in a short-run equilibrium, some firms may earn positive economics profits, others may suffer
economic losses, and still others may earn zero economic profit.
Short-run equilibrium price clears the market and is taken as given by each firm
o
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 supply function must account for entry and exit as well as for the supply choices of
firms that choose to be in the industry.
Positive economic profit induces entry.
Economic profit is positive when the market price p se is higher than a firm’s minimum av. total cost;
pse > min AC(y).
Entry increases industry supply, causing p se to fall.
When does entry cease? When p= min AC(y)
In the long-run market equilibrium, the market price is determined solely by the long-run minimum average
production cost.
o
In the limit, as firms become infinitesimally small, the industry’s long-run supply curve is horizontal at min
AC(y).
o
In a short-run equilibrium, the burden of a sales or an excise tax is typically shared by both buyers and
sellers, tax incidence of the tax depending upon the own-price elasticities of demand and supply.
In the long-run the buyers pay all of a sales or an excise tax
