(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 321

296 PART • Producers, Consumers, and Competitive Markets MC1 Dollars per unit MC2 MC3 S P3 P2 P1 10 15 21 Quantity F IGURE 8.9 INDUSTRY SUPPLY IN THE SHORT RUN The short-run industry supply curve is the summation of the supply curves of the individual firms Because the third firm has a lower average variable cost curve than the first two firms, the market supply curve S begins at price P1 and follows the marginal cost curve of the third firm MC3 until price equals P2, when there is a kink For P2 and all prices above it, the industry quantity supplied is the sum of the quantities supplied by each of the three firms Elasticity of Market Supply In §2.4, we define the elasticity of supply as the percentage change in quantity supplied resulting from a 1-percent increase in price Unfortunately, finding the industry supply curve is not always as simple as adding up a set of individual supply curves As price rises, all firms in the industry expand their output This additional output increases the demand for inputs to production and may lead to higher input prices As we saw in Figure 8.7, increasing input prices shifts a firm’s marginal cost curve upward For example, an increased demand for beef could also increase demand for corn and soybeans (which are used to feed cattle) and thereby cause the prices of these crops to rise In turn, higher input prices will cause firms’ marginal cost curves to shift upward This increase lowers each firm’s output choice (for any given market price) and causes the industry supply curve to be less responsive to changes in output price than it would otherwise be The price elasticity of market supply measures the sensitivity of industry output to market price The elasticity of supply Es is the percentage change in quantity supplied Q in response to a 1-percent change in price P: E s = (⌬Q/Q)/(⌬P/P) Because marginal cost curves are upward sloping, the short-run elasticity of supply is always positive When marginal cost increases rapidly in response to increases in output, the elasticity of supply is low In the short run, firms are capacity-constrained and find it costly to increase output But when marginal