9.3

• An industry supply curve shows the total quantity of goods that all firms in the industry are willing to produce and sell at various price levels.
• In perfect competition, the industry is made up of many small firms, and the supply curve is derived by summing up the supply curves of all individual firms.
• There are two main types of industry supply curves:

  • Short-run industry supply curve
  • Long-run industry supply curve
• In the short run:

  • The number of firms in the industry is fixed. Each firm has a supply curve based on its marginal cost curve, and no new firms can enter or exit the market.
  • The short-run industry supply curve is derived by adding the quantities that each firm produces at each price level.
• The short-run industry supply curve represents the total quantity supplied by all firms at each price level. The curve slopes upward because firms are willing to supply more as prices rise, and new firms may start producing as prices become profitable for them.
• In the short run, the number of firms is fixed, and only existing firms can adjust their output. However, in the long run, firms can enter or exit the market, and all inputs are variable.
• • The long-run supply curve is flatter than the short-run supply curve. This is because in the long run:
  • Firms have more flexibility in adjusting their inputs.
  • New firms can enter the market if they see potential profits, increasing the total quantity supplied.
  • High-cost firms may exit the market, reducing total supply.

  As a result, the long-run supply curve is less steep than the short-run curv
• Short-run supply curve: Steeper, as the number of firms is fixed and output adjustments are limited to current firms.
• • Long-run supply curve: Flatter, as the number of firms can change due to entry and exit, and firms can adjust all inputs.
• The long-run industry supply curve reflects the behavior of firms when they can adjust all inputs and new firms can enter the market.
• The long-run supply curve is flatter than the short-run supply curve because firms can adjust all inputs, and new firms can enter the market. If firms have identical costs, the long-run supply curve may even be horizontal (as shown by LRSS) at P*. This represents a situation where the industry can expand without any increase in costs or prices.
• In the long run, firms enter the market when there are supernormal profits and exit when they incur economic losses:

  • Supernormal profits attract new firms, which increases supply and drives the price down until firms earn normal profits (zero economic profit).
  • Economic losses cause firms to exit the market, reducing supply and driving the price up until the remaining firms earn normal profits.

  This entry and exit of firms ensure that in the long run, all firms earn normal profits, and the market reaches long-run equilibrium.
• • Short-Run Industry Supply Curve:
  • Derived by summing the outputs of all firms in the industry at each price level.
  • It’s steeper because firms are limited in their ability to adjust production, and no new firms can enter.
• Long-Run Industry Supply Curve:

  • Flatter because firms can adjust all inputs, and new firms can enter the market.
  • In the long run, firms enter when there are profits and exit when there are losses, ensuring firms earn only normal profits.