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M19.L03 — Industry Supply and Partial Equilibrium

Module: Module 19 — Costs, Competitive Supply, and Industry Equilibrium Lesson: L03 of 05 Duration: ~30 minutes Level: Intermediate Provenance: Intermediate Microeconomics with Excel (Barreto) | Principles of Microeconomics (Curtis and Irvine)

Learning Objective

Analyze industry supply and partial equilibrium under different cost conditions.

Industry Supply and Partial Equilibrium

Short-run industry supply is the horizontal sum of individual firms' marginal cost curves (above AVC). In the long-run, supply depends on entry/exit: - Constant-cost industry: Horizontal long-run supply (LRS) curve (e.g., identical firms with unlimited input availability). - Increasing-cost industry: Upward-sloping LRS (e.g., specialized inputs become scarce as industry expands). - Decreasing-cost industry: Downward-sloping LRS (e.g., external economies of scale like infrastructure improvements).

Partial equilibrium analysis studies market equilibrium (supply = demand) for one good, ignoring other markets.

Worked Example

[Australian context]

Consider the Australian wine industry. In the short-run, 100 identical wineries each have \(MC = 2y\). Market demand is \(D(p) = 1000 - 10p\).

  1. Short-run supply: Each firm supplies \(y = p/2\), so industry supply is \(S(p) = 100 \cdot p/2 = 50p\).
  2. Equilibrium: Set \(S(p) = D(p)\): \(50p = 1000 - 10p\) ⇒ \(p = 16.67\), \(y = 833.33\).
  3. Long-run: If wine production increases labor costs (increasing-cost industry), LRS slopes upward.

Common Misconception

**"Industry supply curves are always upward-sloping."

Correction: Long-run supply can be horizontal (constant-cost) or downward-sloping (decreasing-cost).

Key Takeaways

  • Short-run industry supply sums firms' MC curves.
  • Long-run supply depends on entry/exit and cost conditions.
  • Partial equilibrium analyzes one market in isolation.
  • External economies can cause decreasing-cost industries.

Practice

  1. Derive the short-run industry supply for 50 firms with \(MC = 0.5y + 2\).
  2. Sketch LRS curves for constant-, increasing-, and decreasing-cost industries.
  3. Explain why the Australian mining industry might be increasing-cost.

Further Resources

Provenance: Intermediate Microeconomics with Excel (Barreto) | Principles of Microeconomics (Curtis and Irvine)