1、Chapter Twenty-ThreeIndustry Supply行業(yè)供給行業(yè)供給StructureuMarket supplyuShort-run supply and equilibriumuLong-run supply and equilibriumuLong-run implications for taxationuFixed inputs and economic rent (經(jīng)濟經(jīng)濟租金租金)Supply From A Competitive IndustryuHow are the supply decisions of the many individual firms

2、 in a competitive industry to be combined to discover the market supply curve for the entire industry?Supply From A Competitive IndustryuSince every firm in the industry is a price-taker, total quantity supplied at a given price is the sum of quantities supplied at that price by the individual firms

3、.Short-Run SupplyuIn a short-run the number of firms in the industry is, temporarily, fixed.uLet n be the number of firms;i = 1, ,n.uSi(p) is firm is supply function.Short-Run SupplyuIn a short-run the number of firms in the industry is, temporarily, fixed.uLet n be the number of firms;i = 1, ,n.uSi

4、(p) is firm is supply function.uThe industrys short-run supply function isS pS piin( )( ). 1Supply From A Competitive IndustrypS1(p)pS2(p)Firm 1s SupplyFirm 2s SupplySupply From A Competitive IndustrypS1(p)pS2(p)pppS1(p)S1(p)Firm 1s SupplyFirm 2s SupplyS(p) = S1(p) + S2(p)Industrys SupplySupply From

5、 A Competitive IndustrypS1(p)pS2(p)pS(p) = S1(p) + S2(p)p”p”S1(p”)S1(p”)+S2(p”)S2(p”)Firm 1s SupplyFirm 2s SupplyIndustrys SupplySupply From A Competitive IndustrypS1(p)pS2(p)pFirm 1s SupplyFirm 2s SupplyS(p) = S1(p) + S2(p)Industrys SupplyShort-Run Industry EquilibriumuIn a short-run, neither entry

6、 nor exit can occur.uConsequently, in a short-run equilibrium, some firms may earn positive economics profits, others may suffer economic losses, and still others may earn zero economic profit.Short-Run Industry EquilibriumMarket demandShort-run industrysupplypseYseYShort-run equilibrium price clear

7、s themarket and is taken as given by each firm.Short-Run Industry Equilibriumy1y2y3ACsACsACsMCsMCsMCsy1*y2*y3*pseFirm 1Firm 2Firm 3Short-Run Industry Equilibriumy1y2y3ACsACsACsMCsMCsMCsy1*y2*y3*pseFirm 1Firm 2Firm 3P P1 1 0P P2 2 0P P2 2 min AC(y).uEntry increases industry supply, causing pse to fal

8、l.uWhen does entry cease?Long-Run Industry SupplyS2(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYSuppose the industry initially containsonly two firms.Mkt.SupplyLong-Run Industry SupplyS2(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp2p2Then the market-clearing price is p2.Long-Run I

9、ndustry SupplyS2(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp2p2y2*Then the market-clearing price is p2.Each firm produces y2* units of output.Long-Run Industry SupplyS2(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp2p2y2*P P 0Each firm makes a positive economicprofit, inducing ent

10、ry by another firm.Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp2p2Market supply shifts outwards.y2*Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp2p2Market supply shifts outwards.Market price falls.y2*Long-Run Industry

11、SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp3Each firm produces less.y3*p3Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp3Each firm produces less.Each firms economic profit is reduced.y3*p3P P 0Long-Run Industry SupplyS3(p)Mkt. DemandAC(

12、y)MC(y)yA “Typical” FirmThe MarketppYp3Each firms economic profit is positive.Will another firm enter?y3*p3P P 0Long-Run Industry SupplyS4(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp3Market supply would shift outwards again.y3*p3Long-Run Industry SupplyS4(p)S3(p)Mkt. DemandAC(y)MC(y)

13、yA “Typical” FirmThe MarketppYp3Market supply would shift outwards again.Market price would fall again.y3*p3Long-Run Industry SupplyS4(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp4Each firm would produce less again.y4*p4Long-Run Industry SupplyS4(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typica

14、l” FirmThe MarketppYp4Each firm would produce less again. Eachfirms economic profit would be negative.y4*P P 0p4Long-Run Industry SupplyS4(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp4Each firm would produce less again. Eachfirms economic profit would be negative.So the fourth firm wo

15、uld not enter.y4*P P 0p4Long-Run Industry SupplyuThe long-run number of firms in the industry is the largest number for which the market price is at least as large as min AC(y).uNow we can construct the industrys long-run supply curve. Long-Run Industry SupplyuSuppose that market demand is large eno

16、ugh to sustain only two firms in the industry.Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp2y2*p2Long-Run Industry SupplyuSuppose that market demand is large enough to sustain only two firms in the industry.uThen market demand increases, the market price rise

17、s, each firm produces more, and earns a higher economic profit.Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp2y2*p2Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp2”y2*p2”Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)M

18、C(y)yA “Typical” FirmThe MarketppYy2*p2”p2”Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYy2*Notice that a 3rd firm will not enter since itwould earn negative economic profits.p2”p2”Long-Run Industry SupplyuAs market demand increases further, the market price ri

19、ses further, the two incumbent firms each produce more and earn still higher economic profits - until a 3rd firm becomes indifferent between entering and staying out.Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYy2*p2”p2”Long-Run Industry SupplyS2(p)S3(p)Mkt. D

20、emandAC(y)MC(y)yA “Typical” FirmThe MarketppYy2*p2”p2”Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYy2*A third firm can now enter, causing all firmsto earn zero economic profits.p2”p2”Long-Run Industry SupplyuSo any further increase in market demand will cause

21、the number of firms in the industry to rise to three.Long-Run Industry SupplyS2(p)S3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYy2*The only relevant part of the short-runsupply curve for n = 2 firms in the industry.p2”p2”Long-Run Industry SupplyuHow much further can market demand increase

22、before a fourth firm enters the industry?Long-Run Industry SupplyMkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp3y3*S3(p)S4(p)p3Long-Run Industry SupplyMkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYp3y3*A 4th firm would now earn negativeeconomic profits if it entered the industry.p3S3(p)S4

23、(p)Long-Run Industry SupplyS3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYy3*S4(p)But now a 4th firm would earn zeroeconomic profit if it entered the industry.p3p3Long-Run Industry SupplyS3(p)Mkt. DemandAC(y)MC(y)yA “Typical” FirmThe MarketppYy3*S4(p)p3p3The only relevant part of the short-

24、runsupply curve for n = 3 firms in the industry.Long-Run Industry SupplyuContinuing in this manner builds the industrys long-run supply curve, one section at-a-time from successive short-run industry supply curves. Long-Run Industry SupplyAC(y)MC(y)yA “Typical” FirmThe MarketLong-RunSupply CurveppYy

25、3*Long-Run Industry SupplyAC(y)MC(y)yA “Typical” FirmThe MarketLong-RunSupply CurveppYy3*Notice that the bottom of each segment ofthe supply curve is min AC(y).Long-Run Industry SupplyuAs each firm gets “smaller” relative to the industry, the long-run industry supply curve approaches a horizontal li

26、ne at the height of min AC(y).Long-Run Industry SupplyAC(y)MC(y)yA “Typical” FirmThe MarketLong-RunSupply CurveppYy3*Notice that the bottom of each segment ofthe supply curve is min AC(y).Long-Run Industry SupplyAC(y)MC(y)yA “Typical” FirmThe MarketLong-RunSupply CurveppYy*The bottom of each segment

27、 of the supplycurve is min AC(y). As firms get “smaller”the segments get shorter.Long-Run Industry SupplyAC(y)MC(y)yA “Typical” FirmThe MarketLong-RunSupply CurveppYy*In the limit, as firms become infinitesimallysmall, the industrys long-run supplycurve is horizontal at min AC(y).Long-Run Market Equ

28、ilibrium PriceuIn the long-run market equilibrium, the market price is determined solely by the long-run minimum average production cost. Long-run market price ispAC yey min( ).0ImplicationsuEconomic profit=0uAll factors are priced at market values, or opp. costs.uLike a firm with constant returns t

29、o scale in the long run.Long-Run Implications for TaxationuIn a short-run equilibrium, the burden of a sales or an excise tax is typically shared by both buyers and sellers, tax incidence of the tax depending upon the own-price elasticities of demand and supply.uQ: Is this true in a long-run market

30、equilibrium?Tax Incidence in the Short-RunpD(p), S(p)MarketdemandMarketsupplyp*q*pbpbqtpbpsTax paid by buyersTax paid by sellersTax incidence = ppppbs *.Long-Run Implications for TaxationLR supply (no tax)pX,YMkt. demandQepeLong-Run Implications for TaxationLR supply (no tax)pX,YMkt. demandQeps=peLR

31、 supply (with tax)Qtpb = pe+ttLong-Run Implications for TaxationLR supply (no tax)pX,YMkt. demandQeps=peLR supply (with tax)Qtpb = pe+ttIn the long-run thebuyers pay all of asales or an excise tax.Fixed Inputs and Economic RentuWhat if there is a barriers to entry or exit?uE.g., the taxi-cab industr

32、y has a barrier to entry even though there are lots of cabs competing with each other. uLiquor licensing is a barrier to entry into a competitive industry.Sources of Barriers to EntryuNatureLandOil fieldEntrepreneurial skillsTalentuRegulationLicenseLand use regulationsFixed Inputs and Economic Rentu

33、Q: When there is a barrier to entry, will not the firms already in the industry make positive economic profits?Fixed Inputs and Economic RentuQ: When there is a barrier to entry, will not the firms already in the industry make positive economic profits?uA: No. Each firm in the industry makes a zero

34、economic profit. Why?Fixed Inputs and Economic RentuAn input (e.g. an operating license) that is fixed in the long-run causes a long-run fixed cost, F.uLong-run total cost, c(y) = F + cv(y).uAnd long-run average total cost, AC(y) = AFC(y) + AVC(y).uIn the long-run equilibrium, what will be the value

35、 of F?Fixed Inputs and Economic RentuThink of a firm that needs an operating license - the license is a fixed input that is rented but not owned by the firm.uIf the firm makes a positive economic profit then another firm can offer the license owner a higher price for it. In this way, all firms econo

36、mic profits are competed away, to zero. Fixed Inputs and Economic RentuSo in the long-run equilibrium, each firm makes a zero economic profit and each firms fixed cost is its payment for its operating license. Fixed Inputs and Economic Renty$/output unitAC(y)AVC(y)MC(y)y*peThe firms economicprofit is zero.Fixed Inpu