Transcript Chapter 24

• Chapter 24 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.
• 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.
• 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).
• 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.
• 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.