Market Supply Curve in the Short Run and Long Run - Video Tutorials & Practice Problems
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Market Supply Curve in the Short Run
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All right. So we saw how the individual firms supply curve acts in the short run, in the long run. Now, let's try the market supply curve. So, first, let's start with the short run here, right. A key feature of the short run is that the number of firms in the market is fixed. Okay? So in the short run firms can't enter or exit the market, right? We saw that they can shut down temporarily, but they can't exit the market in the short run. Right? So we're gonna see is that the markets short run supply curve. This is similar to what we've seen when we've studied supply and demand and build the individual supply into the market supply. Well, it's just gonna be the sum of the individual firms, marginal cost curves, Right? And as we saw with the individual firms, we saw that the marginal cost curve is their supply curve when they do supply. Right? So whenever they we we are above that average variable cost in the short run, that's when we supply. And that supply is gonna be the marginal cost. Right? So here, on the graph, I've got an example of what an individual firm, marginal cost might look like. And this is pretty standard stuff, we see just kind of an upward sloping line, like we'd expect from marginal cost. And an individual firm in this hypothetical situation, at a price of $5 would supply 100 and at a price of $10 would supply 200 right? This is just kind of arbitrary, but the idea is if we're gonna get to the market supply, right? So this is the individual firm supplying these amounts at different, at different prices. Right? So if we were to take this to the whole market, right? Let's imagine that there's 1000 firms that are exactly the same in real life. It probably wouldn't be that way. But just to make this point, let's say that there's 1000 firms that have the same marginal cost curve that we see for this individual firm. Right. Well, what we would do is we would just add all of those marginal costs together at each price, Right? And we would say at a price of $5 1000 firms similar that are identical to this one would produce 100,000 right? 100 times the 1000. So we would just see that the Mark Supply would be 100,000. Right? We're adding all of those together. The 1000 different firms that there are all with the same marginal cost. So this is pretty simple stuff. I don't want you to get too hung up on it because it's stuff we've seen before. If you want a lot more detail and how we construct this market supply. I go back to a video from our supply and demand chapter um and I believe it was just called Individual Supply verse Market Supply. Okay, so you just type that in the search bar and I'm sure it'll come up and you can get a little more detail there. But really what's happening is we're just adding all of the firm's marginal costs together to get to the supply curve of the market. All right, so it's pretty simple. Uh, there's a lot more going on in the long run, so let's go ahead and check that out in the next video.
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Market Supply Curve in the Long Run
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All right? So we saw the short run for the market supply. Now let's check out the long run for the market supply. So one thing I want to note is that in the long run firms are gonna earn zero economic profit, they're not gonna earn any economic profit. Right? And you might be thinking, so why are they gonna be in business? Remember that economic profit includes non monetary opportunity cost, Right? So there's some opportunity cost to the firm say, you know, things that the owner could be doing instead, right? Instead of running this farm where they're producing wheat, maybe they could be doing something instead. That's a non monetary opportunity cost. Right? So those are getting taken into account when we get to this zero economic profit condition, there's still positive accounting profit, right? When we think of just dollars leaving and dollars coming in, there is gonna be some accounting profit and that helps the owner of the firm uh take take account for these opportunity costs, right? That's the reason they're gonna be in business. Um So right here, we've got a profit or loss equation like we're used to, we've got our P minus 80 C. Times Q. Right? We've seen that so far the p minus 80 C. Being the profit per unit. And then we multiply it by quantity. Okay, So let's see how we end up at the zero economic profit in the long run. So let's start in a situation that we're in the short run and we are making profit, right? So there's some short run situation where the price is greater than average total cost, right? And we are making money. So what happens when, when other people see you making money, they're like, hey, they're selling wheat and they're making money. Other firms are gonna enter, firms will enter the market, right? Other people will start farming wheat because they see that there's profits to be made. So we saw this in the supply and demand. Um chapter right? Where we saw that when firms enter the market, the number of suppliers increases will supply is gonna shift to the right and when supply shifts to the right, Well that price is gonna fall, right? So we could do a quick test. Let's might as well do it right here, I'll do it on the on the side, just so you can see what I mean here. So we've got our standard downward demand upward supply. Let me draw those a little better. Right? So that would be our original situation and there was profits being made. So firms enter the market and we're gonna have a new supply curve, right? This was supply and demand here. Well, we're gonna have our new supply when firms enter over here, Right? This will be S. Two. That was S. O. You can't really see the S to let me, let me rewrite that. We've got S. Two right here in S. One, right? So S. Two is after the firms have entered. And what we see happening here was the original price, and now look at the price, the price is lower, Right? So the price falls when firms enter the market, and you can imagine the opposite the price is gonna rise when firms leave the market. Okay, So let's say right here, we had firms entering the market and the price falls, right? And then let's say it was enough that the price now is below average total cost. Right? So now, in the short term short run, people are making losses, Well, now that there's losses, firms are gonna exit, right? If they can't cover their average total cost, firms are gonna exit in the long run, right? So firms will exit in these lost situations and what's gonna happen? Well, just like we discussed, the price is gonna go up, right? So this is gonna keep happening until it finds its equilibrium, and that equilibrium is where P equals A. T. C. Right? Because if it's above 80 C, firms will enter, if it's below 80 C, firms will exit until it finds this P equals a. T. C. Condition, Right? And when price equals 80 see if this is a $5 price, and this is $5 A. T. C. Well, we've got zero there, right, there's zero economic profit when the price equals 80 C. Cool. So let's look down on these graphs and see how this leads us to our long run market supply. All right, so we see an individual firm making zero profit. Right? We've got this price which is equal to the minimum 80 C. Right? This price right here, um where can I write it? I'll put P equals minimum 80 C. Right? And that's what we see on the graph, this price is crossing the A. T. C. At its minimum. Right? So what's happening here is that at that minimum price the market is going to, firms will be entering and exiting the market right? Until we find um the right amount of firms that can supply the demand, fulfill the demand at that price. Right? So we end up seeing with the long run market supply, is that it ends up being a flat line, just like this, this perfectly elastic um supply curve in the long run. So at any any demand, right? It's gonna be fulfilled um by by these individual firms. Right? So, we're gonna have just enough firms in the market to fulfill the supply, or excuse me fulfill the demand. Regardless of where it is. The demand could be right down here and it will it will be fulfilled. The demand could be here, and it's going to be fulfilled, right? No matter where it is, there's gonna be enough firms producing at their minimum 80 C to fulfill that demand, right? Because if there wasn't enough firms, the price would go up, there would be short term profit firms would enter, bringing the price down, Right? So we would see this continuing to happen until we reach this stable equilibrium with this uh price at minimum A. T. C. Cool. So that market supply in the long run is gonna have that flat, perfectly elastic shape. All right, so let's go ahead and move on to the next video.
