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Chapter 24 Industry Supply (Barriers to entry (If there are barriers to…
Chapter 24
Industry Supply
Industry Supply
If there are n firms in the industry, then the industry supply is the horizontal sum of firm supplies
That is, at any given price, we add the quantities that each firm would supply at that price
SR and LR
Short Run
In the short run, some factors are fixed. Some firms may have fixed costs they must pay even if y=0
Some firms may be making losses in the short run if AVC(y
) < p
< AC(y*)
Long Run
In the long run, in a perfectly competitive market,
there is
free entry and exit
If there is free entry and exit, in the LR,
firms making loss would exit if incumbent firms are making profits, entry would occur by new firms
Thus, firm will enter if, after their entry, the resulting market price will be consistent with non-negative profits, i,e,, p>=AC(y)
In the LR equilibrium, incumbent firms have no incentive to exit and new firms have no incentives to enter.
The LR equilibrium price must satisfy
p=min AC
.
That is, the lowest price consistent with nonnegative profits
how to find y
solve
The LR supply
In a perfectly competitive industry, the best approximation of LR supply is p=in AC.
That is, the LR supply is a horizontal line at the "break-even" price
In the LR equilibrium, firms are making 0 profits
Barriers to entry
If there are barriers to entry, the number of firms in the industry may not be determined by market force
Taxicab example in the lecture slide.
Remember to include the opportunity cost in the analysis
If there are barriers to entry, the incumbent firms have an incentive to maintain the barrier to entry.
Activites like lobbying the government to prevent more licenses from being issued (or to ensure they are only issued to current holders) are known as
rent-seeking
