L19
Supply function,
Entry and market structure
Today:
 Partial
equilibrium model (one industry)
D ( p)  12  p
 Example:
Smart phone industry
 Producers with cost functions
 Questions
- Equilibrium with N firms
- Free entry: How many firms (N)?
Producer: Cost curves
C ( y)  y2
F  $1
TC 
ATC 
pall
y M ES 
MC 
A T C M ES 
Optimal supply (price takers)
C ( y)  y2
F  $1
pall

y( p)  

p
p



Industry supply (N firms)
 Individual
supply

y( p)  

 Aggregate
p
p



supply S(p)?

S ( p)  

p
p



Equilibrium with N firms

Demand for a good
D ( p)  12  p


There are N identical firms in the industry
Questions:
1. Equilibrium price (Market clearing)
2. Individual and aggregate production?
3. Profits (positive? zero?)
4. Should we expect entry?
Equilibrium with N firms
1
y 
p,
2
D ( p)  12  p
N  4
p 
*
y 
*
D ( p* )  S ( p* ) 
* 
Quiz
1
y 
p,
2
D ( p)  12  p
Free Entry (Marshall)



Assume
1. No licensing
2. No patents
3. No any other entry barrier
Firms (investors)
- enter when positive profit
- leave when negative profit
No entry or exit as long as
- profit equal to zero
Equilibrium with free entry
N
S ( p, N )  N  y 
p
2
D ( p)  12  p
No entry condition
pall
Number of firms N  ?
Fixed cost and entry
D ( p)  12  p
pall
Market structure
Market structures categorized as
N
1
2
3-10
10-…
Name
pall
Conceptual problem when N<10 :
- price taking controversial
- need for a better model (market power)
- monopoly, oligopoly