LongRun Industry Supply Curve

1
Long-Run Industry Supply Curve
Now suppose that the demand for jeans increases
(shifts right to D2). There is a new short-run
equilibrium (point Y), where the new demand curve
intersects the short-run supply curve. The market
price for jeans now increases to 40, At this
price Nap increases its production to maximizes
its profits at point y. It now makes a positive
economic profit, since the price exceeds its ATC.
(see shaded area). However, since there are no
barriers to entry, and since there is a profit to
be made, more firms will enter the market. The
supply curve will continue to increase (shifts
right to S2) until the price returns to the
long-run equilibrium level (P 30). (Point Z in
the market) Nap Jeans will decrease production
and return to point x and zero economic profits.
Below are the short-run market supply and demand
curves for jeans. Also, given are the cost curves
for Nap Jeans, a typical firm in the
market. Suppose the market for jeans is short-run
equilibrium (Point X). Nap Jeans takes the
market price (P 30) as given and produces
where the price intersects its marginal cost
curve. (point x). The price also equals the
minimum of the average total cost curve, so Naps
profit equals zero. In the market for jeans,
point X is also a long-run equilibrium, there is
no incentive for firm to enter or exit the
market, since economic profits are equal to zero.
The long-run industry supply curve connect the
points where the market is in long-run
equilibrium. In this example, it is the
horizontal line passing through point X and point
Z. The long-run industry supply curve is
horizontal since the zero profit price remains at
30 (the firms minimum average total cost). The
long-run industry supply curve could be upward
sloping if prices of inputs (i.e., wages, rents)
increase as the industry expands.
Price
Market for Jeans
Nap Jeans (typical firm)
/jean
MC
Long-run industry supply curve, LRS
profit
S1
ATC
S2
y
MR2 P2
Y
35
x
X
Z
MR P
Minimum average total cost Break-even point
Long-run market equilibrium
D2
D1
Quantity of Jeans/day
Quantity of Jeans/day