1/25/2008
Long Run Supply Curves for a Competitive Market
If demand increases, then
the price (and profits) will
increase.
More firms will then enter
the industry, increasing
the supply and decreasing
the price back down to the
original price.
price
In the longlong-run the quantity
will increase but the price
will stay the same.
Constant Cost Industry
Industry
D2
D1
Q: How is this possible?
Quantity
S
S
1
2
ATC
LRS
D
D
1
2
Quantity
A: Industry must be small
part of relative input
markets: ergo the industry
will not affect the price of
inputs.
In this case, the industry at large is neither
experiencing external economies or
diseconomies.
Firm
In the long‐run, this
ATC curve won’t
move a bit!
Price
Price
LRS
Constant Cost
Industry
Price
S2
S1
MR
Quantity
In this case, the increase in firms entering the industry does not put
pressure on input markets and does not cause the costs of
individual firms to increase.
Supply Curves for a Competitive Market
Increasing Cost
Industry
S2
Increasing Cost Industry
Industry
Price
More firms enter the
industry, but the increased
demand for input factors
will force production costs
higher
higher.
In the longlong-run the quantity
will increase, and the price
will also increase, but to a
lesser degree .
Q: Why does this happen?
D2
D1
Quantity
S
1
2
2
Quantity
Quantity
In this case, the increase in firms entering the industry does put
pressure on input markets and does cause the costs of individual
firms to increase.
Quantity
In this case, the industry at large is experiencing
external economies .
Q: Why does this happen?
A: This scenario occurs in
budding industries where new
technologies are expensive to
develop, but then become
cheaper as the industry
evolves and grows. Just think
of computers and electronics!
Firm
S
ATC
1
S
In the long‐run, this ATC
curve will fall, causing
everyone to breakeven at
a lower price!
Price
2
Price
Price
In the long
long--run the quantity
will increase, and the price will
decrease!
D2
Industry
If demand increases, then the
price (and profits) will
increase.
More firms enter the industry,
but the increased demand for
input factors will actually
enable production costs to
fall!
D1
Decreasing Cost Industry
Decreasing Cost
Industry
S2
MR
1
Supply Curves for a Competitive Market
S1
ATC
In the long‐run, this ATC
curve will rise, causing
everyone to breakeven at
a higher price!
D
D
A: Industry represents a
large part of relative input
markets, thus it creates
“congestion” in the input
market and causes the
price of inputs to increase.
In this case, the industry at large is experiencing
external diseconomies .
Firm
S
Price
If demand increases, then
the price (and profits) will
increase.
Price
S1
D
D
1
2
Quantity
MR
Quantity
In this case, the increase in firms entering the industry induces external
economies within input markets. This causes the costs of individual firms
to actually decrease! Hooray for everything!!!
1