Ch23-Industry-Supply-中级微观经济学

ChapterTwenty-ThreeIndustrySupplySupplyFromACompetitiveIndustryHowarethesupplydecisionsofthemanyindividualfirmsinacompetitiveindustrytobecombinedtodiscoverthemarketsupplycurvefortheentireindustry?SupplyFromACompetitiveIndustrySinceeveryfirmintheindustryisaprice-taker,totalquantitysuppliedatagivenpriceisthesumofquantitiessuppliedatthatpricebytheindividualfirms.Short-RunSupplyInashort-runthenumberoffirmsintheindustryis,temporarily,fixed.Letnbethenumberoffirms;

i=1,…,n.Si(p)isfirmi’ssupplyfunction.Short-RunSupplyInashort-runthenumberoffirmsintheindustryis,temporarily,fixed.Letnbethenumberoffirms;

i=1,…,n.Si(p)isfirmi’ssupplyfunction.Theindustry’sshort-runsupplyfunctionisSupplyFromACompetitiveIndustrypS1(p)pS2(p)Firm1’sSupplyFirm2’sSupplySupplyFromACompetitiveIndustrypS1(p)pS2(p)pp’p’S1(p’)S1(p’)Firm1’sSupplyFirm2’sSupplyS(p)=S1(p)+S2(p)Industry’sSupplySupplyFromACompetitiveIndustrypS1(p)pS2(p)pS(p)=S1(p)+S2(p)p”p”S1(p”)S1(p”)+S2(p”)S2(p”)Firm1’sSupplyFirm2’sSupplyIndustry’sSupplySupplyFromACompetitiveIndustrypS1(p)pS2(p)pFirm1’sSupplyFirm2’sSupplyS(p)=S1(p)+S2(p)Industry’sSupplyShort-RunIndustryEquilibriumInashort-run,neitherentrynorexitcanoccur.Consequently,inashort-runequilibrium,somefirmsmayearnpositiveeconomicsprofits,othersmaysuffereconomiclosses,andstillothersmayearnzeroeconomicprofit.Short-RunIndustryEquilibriumMarketdemandShort-runindustry

supplypseYseYShort-runequilibriumpriceclearsthe

marketandistakenasgivenbyeachfirm.Short-RunIndustryEquilibriumy1y2y3ACsACsACsMCsMCsMCsy1*y2*y3*pseFirm1Firm2Firm3Short-RunIndustryEquilibriumy1y2y3ACsACsACsMCsMCsMCsy1*y2*y3*pseFirm1Firm2Firm3P1>0P2<0P3=0Short-RunIndustryEquilibriumy1y2y3ACsACsACsMCsMCsMCsy1*y2*y3*pseFirm1Firm2Firm3Firm1wishes

toremainin

theindustry.Firm2wishes

toexitfrom

theindustry.Firm3is

indifferent.P1>0P2<0P3=0Long-RunIndustrySupplyInthelong-runeveryfirmnowintheindustryisfreetoexitandfirmsnowoutsidetheindustryarefreetoenter.Theindustry’slong-runsupplyfunctionmustaccountforentryandexitaswellasforthesupplychoicesoffirmsthatchoosetobeintheindustry.Howisthisdone?Long-RunIndustrySupplyPositiveeconomicprofitinducesentry.Economicprofitispositivewhenthemarketpricepseishigherthanafirm’sminimumav.totalcost;

pse>minAC(y).Entryincreasesindustrysupply,causingpsetofall.Whendoesentrycease?Long-RunIndustrySupplyS2(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYSupposetheindustryinitiallycontains

onlytwofirms.Mkt.

SupplyLong-RunIndustrySupplyS2(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp2p2Thenthemarket-clearingpriceisp2.Long-RunIndustrySupplyS2(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp2p2y2*Thenthemarket-clearingpriceisp2.

Eachfirmproducesy2*unitsofoutput.Long-RunIndustrySupplyS2(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp2p2y2*P>0Eachfirmmakesapositiveeconomic

profit,inducingentrybyanotherfirm.Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp2p2Marketsupplyshiftsoutwards.y2*Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp2p2Marketsupplyshiftsoutwards.

Marketpricefalls.y2*Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp3Eachfirmproducesless.y3*p3Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp3Eachfirmproducesless.

Eachfirm’seconomicprofitisreduced.y3*p3P>0Long-RunIndustrySupplyS3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp3Eachfirm’seconomicprofitispositive.

Willanotherfirmenter?y3*p3P>0Long-RunIndustrySupplyS4(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp3Marketsupplywouldshiftoutwardsagain.y3*p3Long-RunIndustrySupplyS4(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp3Marketsupplywouldshiftoutwardsagain.

Marketpricewouldfallagain.y3*p3Long-RunIndustrySupplyS4(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp4Eachfirmwouldproducelessagain.y4*p4Long-RunIndustrySupplyS4(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp4Eachfirmwouldproducelessagain.Each

firm’seconomicprofitwouldbenegative.y4*P<0p4Long-RunIndustrySupplyS4(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp4Eachfirmwouldproducelessagain.Each

firm’seconomicprofitwouldbenegative.

Sothefourthfirmwouldnotenter.y4*P<0p4Long-RunIndustrySupplyThelong-runnumberoffirmsintheindustryisthelargestnumberforwhichthemarketpriceisatleastaslargeasminAC(y).Nowwecanconstructtheindustry’slong-runsupplycurve.Long-RunIndustrySupplySupposethatmarketdemandislargeenoughtosustainonlytwofirmsintheindustry.Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp2’y2*p2’Long-RunIndustrySupplySupposethatmarketdemandislargeenoughtosustainonlytwofirmsintheindustry.Thenmarketdemandincreases,themarketpricerises,eachfirmproducesmore,andearnsahighereconomicprofit.Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp2’y2*p2’Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp2”y2*p2”Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYy2*p2”p2”Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYy2*Noticethata3rdfirmwillnotentersinceit

wouldearnnegativeeconomicprofits.p2”p2”Long-RunIndustrySupplyAsmarketdemandincreasesfurther,themarketpricerisesfurther,thetwoincumbentfirmseachproducemoreandearnstillhighereconomicprofits--untila3rdfirmbecomesindifferentbetweenenteringandstayingout.Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYy2*p2”p2”Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYy2*p2’”p2’”Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYy2*Athirdfirmcannowenter,causingallfirms

toearnzeroeconomicprofits.p2’”p2’”Long-RunIndustrySupplySoanyfurtherincreaseinmarketdemandwillcausethenumberoffirmsintheindustrytorisetothree.Long-RunIndustrySupplyS2(p)S3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYy2*Theonlyrelevantpartoftheshort-run

supplycurveforn=2firmsintheindustry.p2’”p2’”Long-RunIndustrySupplyHowmuchfurthercanmarketdemandincreasebeforeafourthfirmenterstheindustry?Long-RunIndustrySupplyMkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp3’y3*S3(p)S4(p)p3’Long-RunIndustrySupplyMkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYp3’y3*A4thfirmwouldnowearnnegative

economicprofitsifitenteredtheindustry.p3’S3(p)S4(p)Long-RunIndustrySupplyS3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYy3*S4(p)Butnowa4thfirmwouldearnzero

economicprofitifitenteredtheindustry.p3’p3’Long-RunIndustrySupplyS3(p)Mkt.DemandAC(y)MC(y)yA“Typical”FirmTheMarketppYy3*S4(p)p3’p3’Theonlyrelevantpartoftheshort-run

supplycurveforn=3firmsintheindustry.Long-RunIndustrySupplyContinuinginthismannerbuildstheindustry’slong-runsupplycurve,onesectionat-a-timefromsuccessiveshort-runindustrysupplycurves.Long-RunIndustrySupplyAC(y)MC(y)yA“Typical”FirmTheMarket

Long-Run

SupplyCurveppYy3*Long-RunIndustrySupplyAC(y)MC(y)yA“Typical”FirmTheMarket

Long-Run

SupplyCurveppYy3*Noticethatthebottomofeachsegmentof

thesupplycurveisminAC(y).Long-RunIndustrySupplyAseachfirmgets“smaller”relativetotheindustry,thelong-runindustrysupplycurveapproachesahorizontallineattheheightofminAC(y).Long-RunIndustrySupplyAC(y)MC(y)yA“Typical”FirmTheMarket

Long-Run

SupplyCurveppYy3*Noticethatthebottomofeachsegmentof

thesupplycurveisminAC(y).Long-RunIndustrySupplyAC(y)MC(y)yA“Typical”FirmTheMarket

Long-Run

SupplyCurveppYy*Thebottomofeachsegmentofthesupply

curveisminAC(y).Asfirmsget“smaller”

thesegmentsgetshorter.Long-RunIndustrySupplyAC(y)MC(y)yA“Typical”FirmTheMarket

Long-Run

SupplyCurveppYy*Inthelimit,asfirmsbecomeinfinitesimally

small,theindustry’slong-runsupply

curveishorizontalatminAC(y).Long-RunMarketEquilibriumPriceInthelong-runmarketequilibrium,themarketpriceisdeterminedsolelybythelong-runminimumaverageproductioncost.

Long-runmarketpriceisLong-RunImplicationsforTaxationInashort-runequilibrium,theburdenofasalesoranexcisetaxistypicallysharedbybothbuyersandsellers,taxincidenceofthetaxdependingupontheown-priceelasticitiesofdemandandsupply.Q:Isthistrueinalong-runmarketequilibrium?Long-RunImplicationsforTaxationLRsupply(notax)pX,YMkt.demandQepeLong-RunImplicationsforTaxationLRsupply(notax)pX,YMkt.demandQeps=peLRsupply(withtax)Qtpb=pe+ttLong-RunImplicationsforTaxationLRsupply(notax)pX,YMkt.demandQeps=peLRsupply(withtax)Qtpb=pe+ttInthelong-runthe

buyerspayallofa

salesoranexcisetax.FixedInputsandEconomicRentWhatifthereisabarrierstoentryorexit?E.g.,thetaxi-cabindustryhasabarriertoentryeventhoughtherearelotsofcabscompetingwitheachother.Liquorlicensingisabarriertoentryintoacompetitiveindustry.FixedInputsandEconomicRentQ:Whenthereisabarriertoentry,willnotthefirmsalreadyintheindustrymakepositiveeconomicprofits?FixedInputsandEconomicRentQ:Whenthereisabarriertoentry,willnotthefirmsalreadyintheindustrymakepositiveeconomicprofits?A:No.Eachfirmintheindustrymakesazeroeconomicprofit.Why?FixedInputsandEconomicRentAninput(e.g.anoperatinglicense)thatisfixedinthelong-runcausesalong-runfixedcost,F.Long-runtotalcost,c(y)=F+cv(y).Andlong-runaveragetotalcost,

AC(y)=AFC(y)+AVC(y).Inthelong-runequilibrium,whatwillbethevalueofF?FixedInpu