This node outlines a method for finding the market equilibrium price and quantity in both the short and long run within a market of identical firms. The process involves applying calculus to derive the market supply curve from the firms' shared cost function. This derivation is performed under two conditions: a short-run scenario with a fixed number of firms, and a long-run scenario where firms can enter and exit the market. [3]

Google

The total quantity of a good supplied in a market at a specific price, P, is the aggregate of the quantities provided by all individual firms. If we denote the supply function for the i-th firm as $Q_i = S_i(P)$ and there are 'm' firms in total, the market supply function, $Q = S(P)$, is the summation of each firm's supplied quantity: $Q = S(P) = \sum_{i=1}^{m} S_i(P)$. This method of horizontal summation is used to construct the short-run market supply curve, assuming the number of firms and their production capacities are fixed.

Market Supply as the Sum of Individual Firm Supplies

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

This diagram illustrates the market supply curve for bread as an upward-sloping step-function. The horizontal axis measures the quantity of loaves (Q) from 0 to 4,000, and the vertical axis indicates the price in euros (P) from 0 to 5. The curve is formed by aggregating the supply from all bakeries, starting with those that have the lowest marginal production costs.

The Market Supply Curve for Bread (Figure 8.9)

When a market includes a large number of producers, for instance, 50 bakeries, the market supply curve is composed of numerous small 'steps'. For simplicity, this stepped curve is often approximated by a continuous, smooth line. This simplification makes the model easier to use while retaining the essential upward-sloping nature of supply.

Approximating the Market Supply Curve with a Smooth Curve

The market supply curve represents the marginal cost of producing each additional unit in the market. This relationship is derived from the aggregation of individual firms' outputs in ascending order of their marginal costs. Consequently, the price at any given point on the supply curve reflects the marginal cost of producing that specific unit. The upward slope of the supply curve is a direct result of increasing marginal costs with higher quantities of production.

The Market Supply Curve as the Market's Marginal Cost Curve

When a market consists of multiple firms with identical, upward-sloping supply functions, the market supply curve can visually appear to have the same shape as the individual curves. This apparent similarity is due to the use of different scales for their respective graphs. For instance, in a market with 50 identical firms, the quantity axis for the market supply graph would be scaled to be 50 times larger than that of an individual firm's supply graph to represent the aggregated output.

Visual Representation of Individual vs. Market Supply Curves with Identical Firms

The aggregation of individual supply curves leads to a market supply curve that is considerably flatter and therefore more elastic than the individual supply curves, assuming they are visualized on the same scale. This flatness signifies that the total market quantity is more responsive to price changes than the quantity from any single firm. As a result, the price increase needed to generate an additional unit of output from the entire market is much smaller than the price increase a single firm would require to produce one more unit.

Learn Before

Related