Entry/Exit Effects on Market Price
When all firms produce more/less; or firms enter or exit an industry, this affects the equilibrium market price
Think about basic supply & demand graphs:
- Entry: ↑ industry supply ⟹ ↑q,↓p
- Exit: ↓ industry supply ⟹ ↓q,↑p
Constant Cost Industry (No External Economies) I
Constant cost industry has no external economies, no change in costs as industry output increases (firms enter & incumbents produce more)
A perfectly elastic long-run industry supply curve!
Determinants:
- Industry's purchases are not a large share of input markets
- Often constant marginal costs, insignificant fixed costs
Examples: toothpicks, domain name registration, waitstaff
Constant Cost Industry (No External Economies) II
- Industry equilibrium: firms earning normal π=0,p=MC(q)=AC(q)
Constant Cost Industry (No External Economies) III
Industry equilibrium: firms earning normal π=0,p=MC(q)=AC(q)
Exogenous increase in market demand
Constant Cost Industry (No External Economies) IV
Short run (A→B): industry reaches new equilibrium
Firms charge higher p∗, produce more q∗, earn π
Constant Cost Industry (No External Economies) V
Long run (B→C): profit attracts entry ⟹ industry supply increases
No change in costs to firms in industry, firms enter until π=0 at p=AC(q)
Firms must charge original p∗, return to original q∗, earn π=0
Constant Cost Industry (No External Economies) VI
- Long Run Industry Supply is perfectly elastic
Increasing Cost Industry (External Diseconomies) I
Increasing cost industry has external _dis_economies, costs rise for all firms in the industry as industry output increases (firms enter & incumbents produce more)
An upward sloping long-run industry supply curve!
Determinants:
- Finding more resources in harder-to-reach places
- Diminishing marginal products
- Greater complexity and administrative costs at larger scales
Examples: oil, mining, particle physics
Increasing Cost Industry (External Diseconomies) II
- Industry equilibrium: firms earning normal π=0,p=MC(q)=AC(q)
Increasing Cost Industry (External Diseconomies) III
Industry equilibrium: firms earning normal π=0,p=MC(q)=AC(q)
Exogenous increase in market demand
Increasing Cost Industry (External Diseconomies) IV
Short run (A→B): industry reaches new equilibrium
Firms charge higher p∗, produce more q∗, earn π
Increasing Cost Industry (External Diseconomies) V
Long run: profit attracts entry ⟹ industry supply will increase
But more production increases costs (MC,AC) for all firms in industry
Increasing Cost Industry (External Diseconomies) VI
Long run (B→C): firms enter until π=0 at p=AC(q)
Firms charge higher p∗, producer lower q∗, earn π=0
Increasing Cost Industry (External Diseconomies) VII
- Long run industry supply curve is upward sloping
Decreasing Cost Industry (External Economies) I
Decreasing cost industry has external economies, costs fall for all firms in the industry as industry output increases (firms enter & incumbents produce more)
A downward sloping long-run industry supply curve!
Determinants:
- High fixed costs, low marginal costs
- Economies of scale
Examples: geographic clusters, public utilities, infrastructure, entertainment
Tends towards "natural" monopoly
Decreasing Cost Industry (External Economies) II
- Industry equilibrium: firms earning normal π=0,p=MC(q)=AC(q)
Decreasing Cost Industry (External Economies) III
Industry equilibrium: firms earning normal π=0,p=MC(q)=AC(q)
Exogenous increase in market demand
Decreasing Cost Industry (External Economies) IV
Short run (A→B): industry reaches new equilibrium
Firms charge higher p∗, produce more q∗, earn π
Decreasing Cost Industry (External Economies) V
Long run: profit attracts entry ⟹ industry supply will increase
But more production lowers costs (MC,AC) for all firms in industry
Decreasing Cost Industry (External Economies) VI
Long run (B→C): firms enter until π=0 at p=AC(q)
Firms charge higher p∗, producer lower q∗, earn π=0
Decreasing Cost Industry (External Economies) VII
- Long run industry supply curve is downward sloping!