π Understanding Industry Supply Curves: A Deep Dive
Industry supply curves show the relationship between the price of a good and the total quantity supplied by all firms in the market. The key difference between short-run and long-run industry supply curves lies in the flexibility of firms to enter or exit the market.
β±οΈ Short-Run Industry Supply Curve
In the short run, the number of firms in the industry is fixed. This means that the short-run industry supply curve is derived from the horizontal summation of the individual firms' marginal cost curves above their average variable cost curves. Think of it as the immediate response to a price change, where existing firms adjust their output but no new firms can enter, and no existing firms can exit.
β³ Long-Run Industry Supply Curve
In the long run, firms can enter or exit the industry in response to profit opportunities. The shape of the long-run industry supply curve depends on whether the industry experiences constant, increasing, or decreasing costs as the industry expands.
π Short-Run vs. Long-Run: A Side-by-Side Comparison
| Feature |
Short-Run Industry Supply Curve |
Long-Run Industry Supply Curve |
| Number of Firms |
Fixed |
Variable (Firms can enter or exit) |
| Firm Entry/Exit |
No entry or exit |
Free entry and exit |
| Timeframe |
Period where at least one input is fixed |
Period long enough for all inputs to be variable |
| Shape (Constant Cost Industry) |
Upward sloping |
Horizontal |
| Shape (Increasing Cost Industry) |
Upward sloping |
Upward sloping (steeper than short-run) |
| Shape (Decreasing Cost Industry) |
Upward sloping |
Downward sloping |
| Derivation |
Horizontal sum of firms' MC curves above AVC |
Based on the long-run average cost (LRAC) curve at different industry output levels |
π Key Takeaways
- π The short-run supply curve reflects the existing firms' willingness to supply more at higher prices, given their fixed capacity.
- πͺ The long-run supply curve incorporates the entry and exit of firms, influencing its shape based on cost conditions.
- π° In a constant-cost industry, the entry of new firms doesn't affect input prices, leading to a horizontal long-run supply curve.
- 𧱠In an increasing-cost industry, the entry of new firms drives up input prices, resulting in an upward-sloping long-run supply curve.
- π In a decreasing-cost industry, the entry of new firms lowers input prices, resulting in a downward-sloping long-run supply curve.
- π Understanding the cost structure of an industry is crucial for predicting the shape of its long-run supply curve.
- π‘ Consider how factors like technology, government regulations, and resource availability can impact both short-run and long-run supply dynamics.