Chapter 23 Industry Supply

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• Chapter 23 Industry Supply
• S(p)?1nSi(p). This is easy in the SR, we just
  horizontally sum the individual firms supply
  curve.
• What about the LR industry supply? By free entry
  and free exit, we dont know what n is. That is,
  how many firms there are in the industry.

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Fig. 23.1
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Fig. 23.2
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• Since firms enter the industry when positive
  profits are made, the relevant intersection is
  the lowest price consistent with nonnegative
  profits.
• Denote pminy AC(y). (1) Rule out all points
  that lie below p. (2) Since the demand is
  downward sloping, rule out points which if any
  downward sloping demand passes through, it would
  also intersect a supply associated with a larger
  number of firms.

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Fig. 23.3
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• So every point on the one-firm supply curve that
  lies to the right of the intersection of the
  two-firm supply curve and the line determined by
  p cannot be consistent with the LR equilibrium.
• As the number of firms gets larger, the supply
  curve becomes flatter. So we cannot be very far
  from p. The LR supply curve will be
  approximately flat at p. Just like CRS
  (duplicating by entry).

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Fig. 23.4
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Fig. 23.5
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• Consider taxation in an industry with free entry
  and exit. Initially before the tax, the industry
  is in the long run equilibrium where each firm is
  making zero profit. Moreover, the number of firms
  in this industry is endogenously determined. Now
  a quantity tax of t dollars is imposed. Given the
  number of firms, the supply curve shifts upwards
  by t. Since demand is typically downward sloping,
  the equilibrium price rises less than t.

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• Some tax is born by the consumers and some by
  producers. However, since producers are making
  zero profit before, when the price rises less
  than t, firms are making losses. This results
  some firms in the industry to exit. When this
  happens, the number of the firms in the industry
  decreases, so the industry supply moves to the
  left even further. When the supply moves to the
  left, the equilibrium price increases. This
  continues till the price rises by t so any firm
  is making 0 profit.

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Fig. 23.6