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Chapter 23 Industry Supply

Chapter 23 Industry Supply S(p)=  1 n S i (p). This is easy in the SR, we just horizontally sum the individual firm’s supply curve. What about the LR industry supply? By free entry and free exit, we don’t know what n is. That is, how many firms there are in the industry. Fig. 23.1. Fig. 23.2.

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Chapter 23 Industry Supply

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  1. Chapter 23 Industry Supply • S(p)=1nSi(p). This is easy in the SR, we just horizontally sum the individual firm’s supply curve. • What about the LR industry supply? By free entry and free exit, we don’t know what n is. That is, how many firms there are in the industry.

  2. Fig. 23.1

  3. Fig. 23.2

  4. Since firms enter the industry when positive profits are made, the relevant intersection is the lowest price consistent with nonnegative profits. • Denote p*=miny 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.

  5. Fig. 23.3

  6. 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).

  7. Fig. 23.4

  8. Fig. 23.5

  9. 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.

  10. 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.

  11. Fig. 23.6

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