[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

PRICE
Short-run
supply curve
OUTPUT
Long-run
supply curve
FIGURE 7.8
ELASTICITY OF SHORT-RUN AND LONG-RUN
SUPPLY CURVES FOR A FIRM
Because there is a greater chance for a firm to adjust
to changes in price in the long run, the price elasticity of
the supply curve is greater in the long run than in the
short run.
Long-Run Versus
Short-Run Supply
As we saw in Chapter 6, in the short run the typical firm will have a U-
shaped average cost curve, and a rising marginal cost curve at output
levels above the lowest point of the U. But its long-run marginal cost
curve is flatter because adjustments to changes in market conditions
take time, and some adjustments take longer than others. In the short
run, a firm can add workers, work more shifts, and run the machines
harder (or reduce the rate at which these things are done), but it is
probably stuck with its existing plant and equipment. In the long run,
it can acquire more buildings and more machines (or sell them). Thus,
the long-run supply curve for a firm is more elastic (flatter) than the
short-run supply curve, as shown in Figure 7.8.
The same difference, only more marked, is seen for the industry—
again because the number of firms is not fixed. Even if each firm can
operate only one plant, the industry’s output can be increased by 5 percent
by increasing the number of firms by 5 percent. The extra costs
of increasing output by 5 percent are approximately the same as the
average costs. Accordingly, the long-run market supply curve is roughly
horizontal. Under these conditions, even if the demand curve for the
product shifts drastically, the market will supply much more of the
A
Short-run
market supply
curve
B
PRICE (p )
p 1
p 2
p 0
D 0
Long-run
supply
curve
D 1
PRICE (p )
p 0
Long-run
supply
D 1
curve
D 0
Q 0 Q 1 Q 2
QUANTITY (Q )
Figure 7.9
MARKET EQUILIBRIUM IN THE
SHORT RUN AND LONG RUN
Q 0 Q 2
QUANTITY (Q )
In panel A, the market equilibrium is originally at a price p 0 and an output Q 0 . In the
short run, a shift in the demand curve from D 0 to D 1 raises the price to p 1 and quantity
to Q 1 . In the long run, the supply elasticity is greater, so the increase in price is smaller—
price is only p 2 —and quantity is greater, Q 2 . If supply is perfectly elastic in the long run,
as shown in panel B, shifts in demand will change only the quantity produced in the long
run, not the market price.
164 ∂ CHAPTER 7 THE COMPETITIVE FIRM