HAT Manifesto Part 1/3 - Rubric Cube - 250406 edit

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 5 Firm Behavior and the Organization of Industry

Chapter 14 of 36 - Firms In Competitive Markets

Section 22 of 22

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With a competitive market the assumptions are

· there are a large number of potential entrants

· each of which faces the same costs

· the long-run market supply curve is horizontal at the minimum of average total cost (ATC)

When the demand for the good increases, the long-run result is

· an increase in both the number of firms and in the total quantity supplied

· without any change in the price

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However, there are two reasons the long-run market supply curve might slope upward.

·1· Some resources used in production may be available only in limited quantities.

Consider the market for farm products.

Anyone can buy land and start a farm, but the quantity of land is limited.

As more people become farmers, the price of farmland is bid up.

This raises the costs of all farmers in the market, especially affecting new entrants.

Thus, an increase in demand for farm products

· cannot induce an increase in quantity supplied

· without also inducing an increase in farmers' costs

· which in turn means an increase in price

The result is a long-run upward-sloping supply curve, even with free entry into farming.

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·2· Firms may have different costs.

Consider the market for house painters.

Anyone can enter the market for painting services, but not everyone has the same costs.

Some people work faster than others.

Some people have better alternative uses of their time than others, they have a higher opportunity cost.

For any given price those with lower costs are more likely to enter the painting services market than those with higher costs.

To increase the quantity of painting services supplied, additional entrants must be encouraged to enter the market.

Because these new entrants have higher costs the price must rise to make entry profitable for them.

Again, the result is a long-run upward-sloping supply curve, even with free entry into painting services.

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In any competitive market if firms have different costs some firms earn profit even in the long run.

The price in the market reflects the ATC of the marginal firm, that being the firm that would exit the market if the price was any lower.

This marginal firm earns zero profit, but firms with lower costs earn a profit.

Entry of new firms enticed by a new higher price does not eliminate the profit of lower-cost firms.

This is because new entrants have higher costs than firms already in the market.

Higher-cost firms will enter only if the price rises, making the market profitable for them.

In this case of different costs for different firms a higher price is necessary to create a larger quantity supplied.

The long-run supply curve is upward-sloping rather than horizontal.

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Lower costs = higher profits.

Companies making an identical product cannot keep secret their end product quality from each other but they can keep secret or limit disclosure of information about their cost-lowering processes.

Inevitable disclosure of process information and the general drive for added profits drive companies to continually develop cost-reducing techniques and technologies, i.e. become more economically efficient.

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The basic lesson about firms in competitive markets about entry and exit remains true:

Because firms can enter and exit in the long run the long-run supply curve is more elastic, horizontal, than the short-run supply curve.

(End of chapter 14 of 36)

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Congratulations! 14/36 = 39% of way to becoming a competent economist.