Industry Supply Industry Equilibrium in the Short Run Industry Equilibrium in the Long Run Example Taxation in the Short and Long runs Economic Rents Example Taxi Licenses Industry Equilibrium in the Short Run Short run number of firms in an industry is fixed No entry or exit occur Industry Equilibrium in the Short Run To get industry market supply sum up the individual firm s supply curves n S p Si p i 1 where n is the number of firms in the market Industry Equilibrium in the Short Run S p S S S 2 1 1 0 y 2 Industry Equilibrium in the Short Run p S p D 0 y y Industry Equilibrium in the Short Run AC MC MC AC MC p yA Firm A yB Firm B yC Firm C AC Long Run Industry Equilibrium From the short to the long run there are two types of effect Firms can freely adjust all inputs characterize a firm s supply using its longrun marginal cost curve Exit of firms that would make negative profits in the long run Entry of new firms if incumbents are making positive profits The Long Run Supply Curve p SS pS SL p D yS yL y Long Run Equilibrium Equilibrium price equals minimum longrun average cost each firm in the market is making zero profits At zero profits the industry stops growing because there is no incentive to enter mature industry Zero Economic Profits All factors of production are being paid their opportunity cost or market price what they could earn elsewhere Owner of the firm gets payment for labor and capital inputs that he she supplies Zero Economic Profits Example owner buys capital stock In the long run firm makes zero economic profits once the user cost of capital is taken into account User cost includes 1 economic depreciation 2 forgone interest Part 2 represents capital s remuneration Taxation in the Short Run p SS t SS pD p pS y D y Taxation in the Long Run p p SL t SL p y y D y Economic Rents In some industries the number of firms is fixed even in the long run because some factors of production are available in fixed supply Land natural resources 2 Licenses for cabs liquor 1 Economic Rents Factors of production available in fixed supply earn an economic rent Payment to a factor of production in excess of minimum payment necessary to have that factor supplied Economic Rent Taxi Licenses in NYC License is barrier to entry Yearly accounting profit from license 17K 17K represents an economic rent Cost of supplying licenses zero Economic Rent Taxi Licenses in NYC How much would you pay to buy a license to operate a taxicab in NYC Economic Rent Taxi Licenses in NYC If interest rate is 10 0 10 P 17 K Thus 17 K 170 K P 0 10 Economic Rent Taxi Licenses in NYC In reality cab licenses in NYC sell for 100K Why less than 170K 1 Risk factors 2 Hidden costs Economic Rent Taxi Licenses in NYC Q How much economic profit do owners of cabs make in NYC Economic Rent Taxi Licenses in NYC A Zero Why Because the opportunity cost of not selling the cab license represents a cost of production for the owner Economic Rent Taxi Licenses in NYC If you own a cab license in NYC your revenue minus variable costs are 17K a year The opportunity cost of owning a license is r P Economic Rent Taxi Licenses in NYC As long as 17 K r P the demand for the license would increase driving P up until 17 K r P Economic Rent Taxi Licenses in NYC Thus economic profits are zero 17 K r P 0