Supply curve of a firm under short run Video Lecture | Economics Class 11 - Commerce

welcome back to first year undergraduate
microeconomics
in our last presentation we looked at
the decisions of an individual firm and
how they differed in the short run and
in the long run in this presentation
we're going to go from the supply curve
for an individual firm in the short run
ending the long run up to market level
supply in the short run and in the long
run remember the difference that the
market is not only do fixed costs become
variable in the long run that's what
happens that an individual firm level
and so that also happens at the market
level but also at the market level the
number of firms can change in the long
run firms can enter a nexus we're going
to start with the simplest case where
we're going to assume that there's a
large number an arbitrarily large number
of identical businesses let's start off
at the individual firm level so we've
got little Q individual firm output on
the horizontal axis and dollars on the
vertical axis let's draw on our marginal
cost curve which can be that one our
average total cost curve which looks
pretty good and our average variable
cost so let's just label them so we've
got marginal cost up here of course
average total cost which is the red one
and average variable cost which is the
blue one and we're going to start off
from the short-run now remember that in
the short-run the critical price is
going to be the minimum of average
variable cost so let's pop that on here
let's prove that on our diagram so this
price here that price is just going to
be the minimum Oh average variable cost
okay now why is that critical we'll
remember but in the short-run
a firm will not produce it will shut
down if a price that it faces is less
than minimum average variable cost but
if the price of
is above minimum average variable cost
then it will produce where price which
is marginal revenue is equal to marginal
cost so we can draw the individual
supply curve for a firm in the short-run
as being well the supply is going to be
0 if the price is less than minimum
average variable cost if the price is
above minimum average variable cost then
the supply curve is just going to be
given by the marginal cost curve so the
supply curve is just going to follow
that marginal cost curve so the purple
line here just represents the supply
curve for the individual firm let's just
label us the firm's short-run supply
curve it tells us for any given price
how many units the firm would like to
supply in the short run one other thing
to note the supply curve is
discontinuous it's zero until price hits
minimum average variable cost then it
jumps to a positive level when price
goes above minimum average variable cost
now how do we go from there to the
market well let's try and make this
slide of it small I'm gonna pop it down
here so we can we can still see it
barda's can be a bit tiny down to him
I'm gonna blow this one up if I can here
we go this is going to be a market level
so we going to look here at market
supply it's going to be in the short run
and in the short run we have a fixed
number of firms and that's just going to
be in firms Eames just a number it could
be 10 it could be 50 it could be a
hundred whatever number of firms ok now
we want to try and get the market supply
curve well remember the market supply
curve is just going to be the individual
firm supply curves as they're all our
firms are identical it's just going to
be n of those individual supply curves
added up horizontally so why don't we
mark on here min
average variable cost so that point
there is just again minimum average
variable cost it's the same for every
firm which makes life easy and our
supply curve at the firm level well it's
just going to look like well it's going
to be zero until we get to minimum
average variable cost why well because
every firm produces zero until price
reaches minimum average variable costs
so all firms are producing 0 the markets
producing 0 then once we hit minimum
average variable cost it's going to jump
across to the right and then it's going
to follow up in lots of individual firm
supply curves so it's going to be
flatter than any individual firm supply
curve any individual firm's marginal
cost curve so that's going to be flatter
or more elastic because you've got the
in firms a ding up so this line here is
simply going to be our market supply and
it's the short run market supply okay so
that was pretty easy let's now look at
the long run so we'll start again at the
firm level and looking at the long run
let's draw on our marginal cost curve
again that'll do our average total cost
curve that looks pretty good and our
average variable cost curve and that
looks not too bad anyway okay let's just
label them marginal cost
oh listen trade for him average total
cost and average variable cost okay and
remember that in the long run the
critical price that we're interested in
at the firm level is the minimum of
average total cost that in the long run
if price is less than minimum average
total cost the firm will exit the market
for prices above minimum average total
cost in long run then it will be making
profit symbol long positive economic
profit so let's mark that on here and
label this point minimum average total
cost we're sort of already answered what
the long-run supply at the firm is going
to be if a price the firm faces is less
than minimum average total cost it exits
the market it produces nothing if a
price is above minimum average total
cost it will produce where price which
is marginal revenue intersects marginal
cost so we can put our supply curve on
here and our long-run supply curve will
it's simply going to be zero at any
price that's less than minimum average
total cost and then it's going to jump
across to the marginal cost curve and
for any price above minimum average
total cost it's going to follow the
marginal cost curve up so again we have
the situation where per green curve here
is simply the long-run supply curve for
the firm at the firm level for any price
it tells us how much the firm would like
to supply now let's make that smaller
I'll pop it down here and we've got two
little hidden ones we're going to get to
the market supply curve but we're going
to do it in two steps the first step
we're going to hold the number of firms
constant so again look at market supply
when we have n firms and then we're
going to allow for new firms to enter
the market so what do we know about the
long run supply curve at the market
level with a fixed number of firms well
it's pretty easy if you've got n firms
and here's the individual firms supply
curve then just like before the market
supply curve is just
in of those individual supply curves
added up horizontally so let's mark on
our critical price here minimum average
total cost and we can very easily put on
our market supply curve the market
supply curve is simply going to be zero
at any price below minimum average total
cost we know that because hey in lots of
zero is still zero it's then going to
jump across to the equivalent of end
times at this point here this quantity
but in firms worth of us and then it's
going to track up the end marginal cost
curves and as before it's going to be
flatter or elastic than the individual
firms supply curve so this line that
we've got here this green line is simply
going to be the market supply curve in
the long run but holding the number of
firms fixed at n firms but we know that
in the long run the number of firms is
variable so let me grab this one and I'm
gonna pop it back over here I'm gonna
hide it back over here because it's
actually not gonna be very useful what
we really care about is the curve that
we're going to have here market supply
in the long run after entry and exits so
we've got to ask the question how the
number of firms going to change in the
long run well again the critical point
is going to be given by the minimum
average total cost remember that's the
same for every firm because all our
firms are identical in this example that
makes life a lot easier but let's come
back for a moment back to thinking about
our individual firm
so again almost blow this down a little
bit and let's have a think about what's
happening at the individual firm level
notice that at the individual firm level
firms make zero profits they produce
nothing if price is below minimum
average total cost in fact if they
operated they'd make negative profits so
they exit the market so we know but if
price is below minimum average total
cost market supply will still be nothing
all the firm's will eggs at the market
but what if price is above minimum
average total cost well in that
situation our individual firm has price
which is every driven you above average
total cost and that means that the firm
is going to be making economic profits
and if a firms making economic profits
then someone outside is gonna say hey I
want a bit of that to other firms are
going to want to come into this market
and get their share of that economic
profit and of course because they've got
a large number an arbitrary large number
of identical firms there's always
someone out there who would want to come
in and as long as positive profits can
be earned in this industry as long as
people can enter this industry and do
better than men next best alternative
that's the definition of economic
profits as long as firms to make
positive economic profits they'll keep
pouring into this industry and they're
only going to stop pouring in when the
price comes back to minimum average
total cost so in our simple example here
our market supply curve is actually
really really simple if the price was
below minimum average total cost output
would be zero Bibby exits conversely if
the price was up here above minimum
average total cost well
firms would keep coming in as long as
the price stayed up there so well supply
would be somewhere out there I mean God
knows where it'd be added infinity if
literally of Christ kept on staying
above minimum average total cost new
firms would just keep coming in to get
some profit so we know that the Barkat
supply curve must literally jump across
to infinity at that point it becomes a
horizontal line any price above minimum
average total cost you get entry any
price below minimum average total cost
and you get exit in the long run in the
zero production so our long-run supply
curve that the market level when we have
an arbitrary large number of identical
price taking firms is the horizontal
line at minimum average total cost now
we've made some pretty strong
assumptions in there we've assumed that
there's an arbitrary large number of
identical businesses in the real world
businesses aren't absolutely identical
but this special case still gives us
some really good insight why well let me
now put our short run market supply
curve back on here and I might make that
black and remember we needed a critical
value we needed the minimum average
variable cost there and remember that
the short-run supply curve well it wind
up there - quacks as it was zero until
it hit I'm in a maverick variable cost
bet it jumped across then it sloped up
so here we've got both our short-run now
a short run market supply and our long
run market supply on the same diagram
notice that in the long run the market
supply curve is much more elastic than
it is in the short run
and the reason for that is driven by
this entry and exit it's the entry and
exit of new firms that mean that the
market supply curve in the long run can
respond much more to a price change then
it can in the short run now firms differ
our long run market supply curve won't
be literally horizontal and so most of a
time when economists analyze market
behavior in a perfectly competitive
market they will have an upward sloping
long run supply curve but it will always
be more elastic the short run market
supply curve and that extra elasticity
that extra change in quantity for a
given change in price is given by entry
and exit that'll do for now next
presentation we're going to apply this
to the Australian mining boom talk to
you then