L19

Supply function, Entry and market structure

Today: Partial equilibrium model (one industry)

Producers with cost functionsQuestions - Equilibrium with N firms- Free entry: How many firms (N)?

( ) 12D p p

Producer: Cost curves2( )C y y

pall

$1F

ATC

MES MESy ATC

MC

TC

Optimal supply (price takers)2( )C y y

pall

$1F

( )

p

y pp

Industry supply (N firms) Individual supply

Aggregate supply S(p)?

( )

p

y pp

( )

p

S pp

Equilibrium with N firms Demand for a good

There are N identical firms in the industry Questions:

1. Equilibrium price (Market clearing)2. Individual and aggregate production?3. Profits (positive? zero?)4. Should we expect entry?

( ) 12D p p

Equilibrium with N firms1 ,2

y p ( ) 12D p p 4N

*

*

* *

*

( ) ( )

p

y

D p S p

Assume1. No licensing2. No patents3. No any other entry barrier

Firms - enter when positive profit- leave when negative profit

No entry or exit as long as- profit equal to zero

Free Entry (Marshall)

No entry condition

Number of firms

Equilibrium with free entry

pall

( ) 12D p p ( , )2NS p N N y p

?N

Fixed cost and entry

pall

( ) 12D p p

Market structureMarket structures categorized as

Conceptual problem when N<10 : - price taking controversial- need for a better model (market power)- monopoly, oligopoly

pall

N 1 2 3-10 10-…

Name