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Comprehension check. Long-run supply VS. Short-run supply




LONG-RUN SUPPLY vs. SHORT-RUN SUPPLY

SUPPLEMENTARY READING

SPEECH PRACTICE

1. Summarize the information from Unit 4 to be ready to speak on “Supply”. First step to be done is to write a plan of your future report.

2. Choose either the problem of excess supply or excess demand for a particular product and study how the sellers tackle with it. Speak on the role of the government in price regulation. Refer to different additional sources to make your report interesting, instructive and informative.

Short-run supply curves always slope upward for a perfectly competitive industry. The long-run supply curve slopes upward only for increasing-cost industries **. Economic profits for firms on all points along a long-run supply must be zero. This is not the case for points on the short-run supply curve.

Because there is more flexibility to expand in the long-run, long-run supply curves can be expected to be more price elastic than corresponding short-run supply curves. For the case of constant costs, long-run price elasticity of supply is infinite. This is because the long-run supply curve for a constant-costs industry * is a flat line with zero slope. For any price and quantity supplied, price elasticity on such a line is infinite.

For industries of increasing costs, price elasticity of long-run supply is less than infinity but greater than zero. Long-run supply could be more inelastic at higher prices, depending on the way input prices increase when the industry expands.

Estimates of price elasticity of long-run supply suggest that constant costs prevail in many industries. For example, one study found that the long-run supply of new housing construction was infinitely elastic. This implies that the price per square foot of construction, after adjustment for inflation, can be expected to be constant in the long run. On the other hand, the long-run price elasticity of many agricultural commodities has been estimated at less than 1, which suggests that agriculture is an industry of increasing costs.

* a constant-costs industry is one for which input prices are unaffected by the quantity produced or the number of firms in the industry.

** an increasing-costs industry is one for which the prices of at least some of the inputs used increase as a direct result of the expansion of the industry.

1. Why is supply more price elastic in the long run than in the short run?

2. How do constant-cost industry and increasing-cost industry respond to price elasticity?




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