L18

1
L18

• Supply function,
• Entry and market structure

2
Today

• Partial equilibrium model (one industry)
• Producers with cost functions
• Questions
• Equilibrium with N firms
• Free entry How many firms (N)?

3
Producer Cost curves
pall
4
Optimal supply (price takers)
pall
5
Industry supply (N firms)

• Individual supply
• Aggregate supply S(p)?

6
Equilibrium with N firms

• Demand for a good
• There are N identical firms in the industry
• Questions
• Equilibrium price (Market clearing)
• Individual and aggregate production?
• Profits (positive? zero?)
• Should we expect entry?

7
Equilibrium with N firms
pall
8
Equilibrium with Free Entry

• Assume
• No licensing
• No patents
• 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
• equilibrium price and y MES

9
Equilibrium with free entry

• No entry condition
• Number of firms

pall
10
Market structure

• Market structures categorized as
• Conceptual problem when Nlt10
• - price taking controversial
• need for a better model (market power)
• monopoly, oligopoly

N 1 2 3-10 10-
Name
pall