November 15, 2015

Ch. 24: INDUSTRY SUPPLY - Summary - Intermediate Microeconomics - Varian


In Ch. 23, We have seen how to derive a firm’s supply curve from its marginal cost curve. In a market,  there will typically be many firms. So the supply curve the industry presents to the market will be the sum of the supplies of all the individual firms. In this chapter,  we learn how develop the
industry supply curve and make decisions based on it.

23.1 Short Run Industry Supply

A. Industry supply: Sum of the MC curves

(1) S(p) =

(2) Example:

Firm 1:            Firm 2:

c(y)= 2y2 +3          c(y)= 3y2 +3

MC= 4y                 MC=6y

P=4y                 P=6y

S1(p)= p/4         S2(p)= p/6

Market Supply: S(p) = S1+ S2= p/4 + p/6 = (10/24)p

B. Equilibrium in the short run

(1) Look for point where D(p) = S(p)

(2) can then measure profits ()of firms

C. Short run and long run supply

(1) If profits > 0, entry of new firms in the long run

(2) If any firm have identical cost structure, then

      Price in long run = minimum of AC-curve

D. Economic rent

(1) If no factors are scarce: Long run supply curve: Horisontal

P= minAC

All firms have Zero Profits

(no factors of production are "paid" more than its value,

i.e. the opportunity cost of the factor)

(2) What if some factors (of identical quality) are scarce in the long run? Because:

(a) licences/patents

(b) raw materials, land

(3) Entrants (new firms) will have higher costs

(4) "Old" firms will still have economic rents, because price won’t be as low as their minimum AC.

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