Industry Supply; Equilibrium Under

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Lecture 11 Industry Supply Equilibrium
Under Perfect Competition
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Short Run Industry Supply

• Consider a group of firms that produce lime
  (calcium oxide and calcium hydroxide).
• What does the industry supply curve of lime look
  like in the short run?
• We consider two hypothetical cases (a) firms
  have identical costs, (b) firms differ in their
  cost structures.

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Short Run Industry SupplyAll Firms Identical

• Figure 1 below graphs industry supply in the case
  of identical lime producers.
• This is the sum of the individual firm supply
  curves, but below p5 no one enters because
  pltAVC. For p at least equal to 5 supply follows
  MC.
• With limited numbers of firms supply is upward
  sloping.

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Chapter 10, Figure 1Short-Run Industry
Supply With Identical Lime Producers
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Short Run Profits and Price

• Figure 2 shows something interesting that is
  obvious when you think about it.
• At a price of 7 firms are profitable.
• At a price of 5 firms take a loss equal to fixed
  cost, the largest loss possible.
• The number of firms is given so the value of the
  firm varies directly with price.

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Chapter 10, Figure 2Price, Profitability, and
Firm Value in the Short Run
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Short Run Industry SupplyDifferent Cost
Structures

• Figure 3 is a graph of industry supply when firms
  have different costs.
• Firm 1 has an entry price p5, at minimum AVC.
  Firm 2 has an entry price p6, at its minimum
  AVC.
• Firm 1 has lower marginal cost at the same output
  as firm 2. Overall firm 1 is more efficient than
  firm 2.

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Chapter 10, Figure 3Short-Run Market Supply with
Different Lime Producers
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Short Run Industry SupplyDifferent Cost
Structures

• In figure 3 firms jump from zero to positive
  output when price reaches minimum AVC.
• When the second firm enters, that introduces a
  flat in the supply curve.
• But overall, supply is upward sloping, just as in
  figure 1.

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Long Run Supply

• Well consider three cases
• (A) All firms have identical costs costs stay
  the same regardless of industry output.
• (B) Firms have different costs but costs stay the
  same regardless of industry output.
• (C) Each firms costs rise or fall as industry
  output increases.

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Long Run Supply Constant Cost Industry

• Case (A) all firms have identical costs and
  costs do not depend on industry output. This is
  a constant cost industry.
• Figure 4 below graphs this case for the vegetable
  oil industry.
• Entry of firms drives price down to the minimum
  AC of 10. Pure profits equal zero for each firm.

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Chapter 10, Figure 4 Long-Run Firm Supply With
Identical Vegetable Oil Firms (a)
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Long Run Supply Constant Cost Industry

• Figure 5 graphs the industry supply curve for the
  constant cost vegetable oil industry.
• A vast supply of firms exists whose minimum
  average cost (entry price) is always 10.
• Thus industry supply is flat or perfectly elastic.

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Chapter 10, Figure 5Long-Run Market Supply With
Identical Vegetable Oil Firms (b)
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Long and Short Run Supply of Vegetable Oil

• Though the supply curve of vegetable oil is
  perfectly elastic in the long run, it is upward
  sloping in the short run.
• Why? Because the number of firms is limited in
  the short run and supply follows the sum of
  individual firms MC curves. See figure 6 on the
  next slide.

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Chapter 10, Figure 6 Short and Long Run Supply
of Vegetable Oil
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Rising World Supply of Cotton

• Figure 7 below illustrates case (B) Cotton
  producers have different costs, but these costs
  differ in every cotton-picking country.
• This causes a rising supply curve (as in figure
  3, its short run counterpart).

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Chapter 10, Figure 7Upward-Sloping Long
Run Supply of Cotton
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Rising and Falling Costs

• Figures 8 and 9 illustrates case (C ) the firms
  costs rise or fall as industry output increases.
• In figure 8 identical firms experience rising
  costs as the industry expands production. Long
  run supply slopes up.
• The opposite is true in figure 9 long run supply
  slopes down.

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Chapter 10, Figure 8Long Run Supply of
an Increasing Cost Industry
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Chapter 10, Figure 9 Long Run Supply of
a Decreasing Cost Industry