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Managerial Economics

ASSIGNMENT

Short run and long run supply in


competitive markets

SUBMITTED BY:

Asad Mahmood

MBA 4th Morning

Roll No. 13

SUBMITTED TO :

Miss. Bushra Hamid

Institute of Management Studies

University Of Peshawar

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Managerial Economics

Contents

Short Run and Long Run Supply in Competitive Markets ................ 3


The Market Supply Curve................................................................. 3
Market Supply with Many Identical Sellers...................................... 4
The Effects of Changing a Variable Input Price ................................ 6

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Short Run and Long Run Supply in


Competitive Markets
 Market Supply Curves
 Markets with Homogeneous Suppliers
 The effects of changing input prices on short and long run supply
 The effects of changing technology on short and long run supply

The Market Supply Curve


 Like the market demand curve, the market supply curve is just the sum of the quantities
supplied by each seller at each market price.
 Market supply, thus reflects the marginal costs of each of the producers in the market.

Agricultural Firm Cost Curves

 The graph shows the cost curves for a


single apple farm (identical to
Jonathan's apple farm).
 At a production level of 200 tons/year,
marginal cost = average cost = $400.
 The owners make no economic profits
but all factors, including the owner's
time are compensated at their
opportunity cost.

Supply Curve for a New York Apple Farm

 The data used to construct Jonathan's


supply curve were representative of the
typical New York State apple farm.
 The supply curve for a single apple farm
is shown above.
 It is the same as the supply curve we
have been using.

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Market Supply with Many Identical


Sellers
 In markets where there are many identical sellers of a homogenous product, it is
important to distinguish between the "short run" and "long run" supply curves.
 We have been talking about the "short run" supply curve because some factors were
variable (labor) and some were fixed (space, managerial time).

Long and Short Run Supply

 The long run supply curve measures the quantities of a good or service offered for sale
by all sellers--potential and actual--who could sell in the market.
 Long run supply is more elastic than short run supply.

Total number of
1,700
farms
New York State Apple Supply with Identical
Firms Quantity Marginal
Average
Supplied Cost =
Cost
 The table shows the short run supply of (thousands Short Run
($/ton)
New York State apples with 1,700 firms of tons) Price
identical to Jonathan's Apple Farm. 0
 The table was constructed by
170 200 552
multiplying the quantities from a single
apple farm by 1,700 (total number of 255 248 437
farms). 340 400 400
 This is a short run supply curve because
at prices below $400, some farms want 357 440 401
to leave the market (average cost 374 484 404
exceeds price) and at prices above $400
391 528 408
farms are making economic profits, so
there will be entry of new farms. 408 588 414
425 632 422
510 1,360 690

Short Run and Long Run Supply Curves

 On the short run supply curve the number of firms in the industry is constant because
no firm can change its fixed factors, which include land.

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Managerial Economics

 On the long run supply curve all firms operate at the point where marginal cost equal
average cost. The number of firms adjusts to vary the supply.
 Remember, all firms are identical.

Total number of
1,700 Long Run
farms

Long Run and Short Run NYS Apple Quantity Marginal Long
Average Number
Supply Curves Supplied Cost = Run
Cost of Apple
(thousands Short Run Price
($/ton) Farms
 In the short run each of 1,700 of tons) Price ($/ton)
apple farms moves along its 0 400 0
marginal cost curve producing
170 200 552 400 850
the short run supply shown in
the table at the right. 255 248 437 400 1,275
 In the long run each firm 340 400 400 400 1,700
produces exactly 200 tons and
the number of firms varies. 357 440 401 400 1,785
 Thus, the long run supply curve 374 484 404 400 1,870
is perfectly elastic at a price of
391 528 408 400 1,955
$200/ton.
408 588 414 400 2,040
425 632 422 400 2,125
510 1,360 690 400 2,550
Graph of the NYS Apple Supply Curves

 The graph shows the short run and long run supply curves for New York State apples.
 The short run curve is 1,700 (current number of farms) times the supply of a typical .

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The Effects of Changing a Variable Input


Price
 A variable input is one that can be adjusted in the short run.
 For the apple farm example above, hired labor is the only variable input.
 We are going to analyze the effects of increasing the price of a variable input on the
short and long run supply curves in a competitive product market.

Changing a Variable Input Price: Initial Firm


Position

 Initially, the firm operates along the


MC curve.
 Any quantity on this MC curve is a
possible short run equilibrium.
 The MC curve cuts the ATC curve at
the minimum ATC.
 The long run Q for the firm occurs at
the minimum ATC.

This figure is the initial firm position for all


of the examples that follow.

Changing a Variable Input Price: Initial


Industry Position

 The graph shows the entire market.


 The short run supply curve is the
sum of the MC curves for all
currently operating firms.
 The long run supply is infinitely
elastic at the price equal to the
minimum ATC for the initial input
prices.

This figure is the initial industry position


for all of the examples that follow.

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Changing a Variable Input Price: Firm-level


Changes

 The initial firm position is shown


with the curves we used above.
 When the price of a variable input
increases, the new MC is above and
to the left of the original.
 The new ATC is above the original
ATC curve.
 The new minimum ATC is above the
original.
 The new long run Q occurs at the
intersection of the new MC and new
ATC.

Changing a Variable Input Price: Industry-


level Changes

 The graph, once again, shows the


entire market.
 The new short run supply curve, the
sum of the MC curves for all
currently operating firms, is above
and to the left of the original supply
curve.
 The new long run supply is infinitely
elastic at the price equal to the
minimum ATC for the new input
prices.

Increasing a Variable Input Price: Summary

 When the price of a variable input increases:


o Marginal cost increases for every firm.
o Average total cost increases for every firm.
o Minimum ATC increases for every firm.
o Short run industry supply decreases, shifts to the left.
o The long run industry supply curve shifts to a line infinitely elastic at the new,
higher minimum ATC.

 What are the effects of decreasing a variable input price on the short and long run
supply curves in a perfectly competitive industry?

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Managerial Economics

 When the price of a variable input decreases:


o Marginal cost decreases for every firm.
o Average total cost decreases for every firm.
o Minimum ATC decreases for every firm.
o Short run industry supply increases, shifts to the right.
o The long run industry supply curve shifts to a line infinitely elastic at the new,
lower, minimum ATC.

The Effects of Changing a Fixed Input Price

 A fixed input is one that cannot be adjusted in the short run.


 In the apple farm example, land and the proprietor’s time are both fixed inputs.
 We are going to analyze the effects of increasing the price of a fixed input on short and
long run supply in a competitive product market.

Changing a Fixed Input Price: Firm-level


Changes

 The initial firm position is shown


with the curves we used above.
 When the price of a fixed input
increases, the MC curve does not
shift.
 The new ATC is above the original
ATC curve but its minimum is along
the original MC curve.
 The new minimum ATC is above the
original.
 The new long run Q occurs at the
intersection of the original MC and
new ATC.

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Changing a Fixed Input Price: Industry-level


Changes

 The graph, once again, shows the


entire market, with the initial
position shown in the curves we
used above.
 The short run supply curve, the sum
of the MC curves for all currently
operating firms, does not change.
 The new long run supply is infinitely
elastic at the price equal to the
minimum ATC for the new input
prices.

Increasing a Fixed Input Price: Summary

 When the price of a fixed input increases:


o Marginal cost does not change.
o Average total cost rises.
o Minimum average total cost rises.
o Short run supply does not change.
o The long run supply curve shifts to a line that is infinitely elastic at the new,
higher minimum ATC.

 What are the effects of decreasing a fixed input price on the short and long run supply
curves in a perfectly competitive industry?

 When the price of a fixed input decreases:


o Marginal cost is unchanged for every firm.
o Average total cost decreases for every firm.
o Minimum ATC decreases for every firm.
o Short run industry supply does not change.
o The long run industry supply curve shifts to a line infinitely elastic at the new,
lower, minimum ATC.

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The Effects of Improving a Firm’s


Technology

A firm’s technology is the set of methods that it uses to convert inputs into product, called the
production function.

Improving a firm’s technology means that it is possible to produce more with the same fixed
and variable inputs.

Improving Technology: Firm-level Changes

 The initial firm position is shown


with the curves we used above.
 When the technology improves, the
new MC is below and to the right of
the original
 The new ATC is below the original
ATC curve.
 The new minimum ATC is below the
original.
 The new long run Q occurs at the
intersection of the new MC and new
ATC.

Improving Technology: Industry-level


Changes

 The graph, once again, shows the


entire market, with the initial curves
that we used for the industry in the
examples above.
 The new short run supply curve, the
sum of the MC curves for all
currently operating firms, is below
and to the right of the original
supply curve.
 The new long run supply is infinitely
elastic at the price equal to the new,
lower minimum ATC corresponding

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to the improved technology.

Improving Technology: Summary

 When technology improves in a competitive industry:


o Marginal cost falls, shifts to the right.
o Average total cost falls.
o Minimum average total cost falls.
o Short run supply increases, shifts to the right.
o The long run supply curve shifts to a line that is infinitely elastic at the new,
lower minimum ATC.

Summary

 The market supply curve is the sum of the quantities supplied by each firm at each price.
 Markets with homogeneous suppliers (agricultural products like New York State apples,
for example) have perfectly elastic long run supply curves.
 Changing the cost of a variable factor changes short and long run supply.
 Changing the cost of a fixed factor changes long run supply.
 Changing technology changes short and long run supply

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BIBLIOGRAPHY
 http://www.questia.com
 Review of The Long and the Short’, Economica, New Series, 26 (103),260-262.
 Marshall, A. (1920). Principles of Economics, 9th ed., New York

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