Chapter 14Timing of the Supply ResponsePricing in the Very Short RunSlide 4Short-Run Price DeterminationPerfect CompetitionShort-Run Market SupplyShort-Run Market Supply CurveShort-Run Market Supply FunctionShort-Run Supply ElasticityA Short-Run Supply FunctionSlide 12Equilibrium Price DeterminationSlide 14Slide 15Slide 16Slide 17Shifts in Supply and Demand CurvesSlide 19Shifts in SupplyShifts in DemandChanging Short-Run EquilibriaSlide 23Slide 24Mathematical Model of Supply and DemandSlide 26Slide 27Slide 28Slide 29Long-Run AnalysisSlide 31Slide 32Long-Run Competitive EquilibriumSlide 34Long-Run Equilibrium: Constant-Cost CaseSlide 36Slide 37Slide 38Slide 39Slide 40Infinitely Elastic Long-Run SupplySlide 42Shape of the Long-Run Supply CurveLong-Run Equilibrium: Increasing-Cost CaseSlide 45Slide 46Slide 47Slide 48Long-Run Equilibrium: Decreasing-Cost CaseSlide 50Slide 51Slide 52Slide 53Classification of Long-Run Supply CurvesSlide 55Long-Run Elasticity of SupplyComparative Statics Analysis of Long-Run EquilibriumSlide 58Slide 59Slide 60Slide 61Rising Input Costs and Industry StructureSlide 63Producer Surplus in the Long RunSlide 65Slide 66Slide 67Ricardian RentSlide 69Slide 70Slide 71Slide 72Slide 73Slide 74Slide 75Important Points to Note:Slide 77Slide 78Slide 79Slide 80Slide 81Chapter 14THE PARTIAL EQUILIBRIUM COMPETITIVE MODELCopyright ©2002 by South-Western, a division of Thomson Learning. All rights reserved.MICROECONOMIC THEORYBASIC PRINCIPLES AND EXTENSIONSEIGHTH EDITIONWALTER NICHOLSONTiming of the Supply Response•In the analysis of competitive pricing, the time period under consideration is important–very short run•no supply response (quantity supplied is fixed)–short run•existing firms can alter their quantity supplied, but no new firms can enter the industry–long run•new firms may enter an industryPricing in the Very Short Run•In the very short run (or market period), there is no supply response to changing market conditions–price acts only as a device to ration demand•price will adjust to clear the market–the supply curve is a vertical linePricing in the Very Short RunQuantityPriceSDD’Q*P1P2When quantity is fixed in thevery short run, price will risefrom P1 to P2 when the demandrises from D to D’Short-Run Price Determination•The number of firms in an industry is fixed•These firms are able to adjust the quantity they are producing–they can do this by altering the levels of the variable inputs they employPerfect Competition•A perfectly competitive industry is one that obeys the following assumptions:–there are a large number of firms, each producing the same homogeneous product–each firm attempts to maximize profit–each firm is a price taker•its actions have no effect on the market price–information is perfect–transactions are costlessShort-Run Market Supply•The quantity of output supplied to the entire market in the short run is the sum of the quantities supplied by each firm–the amount supplied by each firm depends on price•The short-run market supply curve will be upward-sloping because each firm’s short-run supply curve has a positive slopeShort-Run Market Supply CurveX XXPPPsAsBXA*XB*P*To derive the market supply curve, we sum thequantities supplied at every priceFirm A’ssupply curveFirm B’ssupply curveMarket supplycurveX*SXA* + XB* = X*Short-Run Market Supply Function•The short-run market supply function shows total quantity supplied by each firm to a marketniiswvPqwvPQ1),,(),,(•Firms are assumed to face the same market price and the same prices for inputsShort-Run Supply Elasticity•The short-run supply elasticity describes the responsiveness of quantity supplied to changes in market priceSSPSQPPQPQe  in change %supplied in change %,•Because price and quantity supplied are positively related, eS,P > 0A Short-Run Supply Function•Suppose that there are 100 identical firms each with the following short-run supply curveqi = 50P (i = 1,2,…,100)•This means that the market supply function is given by1001000550100iisPPqQ ,)(A Short-Run Supply Function•In this case, computation of the elasticity of supply shows that it is unit elastic1500000050005 PPQPQPPQeSSSPS,,,Equilibrium Price Determination•An equilibrium price is one at which quantity demanded is equal to quantity supplied–neither suppliers nor demanders have an incentive to alter their economic decisions•An equilibrium price (P*) solves the equation:),*,(),'*,( wvPQIPPQSDEquilibrium Price Determination•The equilibrium price depends on many exogenous factors–changes in any of these factors will likely result in a new equilibrium priceEquilibrium Price DeterminationQuantityPriceSDQ1P1The interaction betweenmarket demand and marketsupply determines theequilibrium priceEquilibrium Price DeterminationQuantityPriceSDQ1P1Q2P2Equilibrium price andequilibrium quantity willboth riseIf many buyers experiencean increase in their demands,the market demand curvewill shift to the rightD’Equilibrium Price DeterminationQuantityPriceSMCq1P1q2P2This is the short-runsupply response to anincrease in market priceIf the market rises, firms willincrease their level of outputSATCShifts in Supply and Demand Curves•Demand curves shift because–incomes change–prices of substitutes or complements change–preferences change•Supply curves shift because–input prices change–technology changes–number of producers changeShifts in Supply and Demand Curves•When either a supply curve or a demand curve shift, equilibrium price and quantity will change•The relative magnitudes of these changes depends on the shapes of the supply and demand curvesShifts in SupplyQuantity QuantityPricePriceSS’SS’DDPPQP’Q’P’QQ’Elastic Demand Inelastic DemandSmall increase in price,large drop in quantityLarge increase in price,small drop in quantityShifts in DemandQuantity QuantityPricePriceSSD DPPQP’Q’P’Q Q’Elastic Supply Inelastic SupplySmall increase in price,large rise in quantityLarge increase in price,small rise in quantityD’D’Changing Short-Run Equilibria•Suppose that the market demand for hamburgers isQD = 10,000 – 5,000P and the short-run market supply isQS = 5,000P•Setting these equal, we find P* = $1Q* = 5,000Changing Short-Run Equilibria•Suppose that the wage of hamburger workers rises so that the short-run market supply becomesQS = 4,000P•Solving for the