class: center, middle, inverse, title-slide # Extras: External Economies ## ECON 306 · Microeconomic Analysis · Spring 2020 ### Ryan Safner<br> Assistant Professor of Economics <br> <a href="mailto:safner@hood.edu"><i class="fa fa-paper-plane fa-fw"></i> safner@hood.edu</a> <br> <a href="https://github.com/ryansafner/microS20"><i class="fa fa-github fa-fw"></i> ryansafner/microS20</a><br> <a href="https://microS20.classes.ryansafner.com"> <i class="fa fa-globe fa-fw"></i> microS20.classes.ryansafner.com</a><br> --- class: inverse, center, middle # Entry Effects & External Economies --- # Entry/Exit Effects on Market Price - Firms entering or exiting an industry have an **effect on the new market price** - Think about basic supply & demand graphs: - **Entry**: `\(\uparrow\)` industry supply `\(\implies\)` `\(\uparrow q, \downarrow p\)` - **Exit**: `\(\downarrow\)` industry supply `\(\implies\)` `\(\downarrow q, \uparrow p\)` --- # External Economies - How large this change in price will be from entry/exit depends on industry-wide costs and .shout[external economies] - **Economies of scale** are *internal* to the firm (a firm's own average cost curve) - *External* economies have to do with how the size of the *entire* industry affects *all individual firm's costs* - These are **externalities** that spill over across all firms in an industry - Three possibilities --- # Constant Cost Industry (No External Economies) I .pull-left[ - .shout[Constant cost industry] has *no external economies*, no change in costs as industry output increases (firms enter & incumbents produce more) - A *perfectly elastic long-run industry supply curve*! - Determinants: - Industry's purchases are not a large share of input markets - Often constant marginal costs, insignificant fixed costs - Examples: toothpicks, domain name registration, waitstaff ] .pull-right[ .center[   ] ] --- # Constant Cost Industry (No External Economies) II .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-1-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-2-1.png" width="504" /> ] - Industry equilibrium: firms earning normal `\(\pi=0, p=MC(q)=AC(q)\)` --- # Constant Cost Industry (No External Economies) III .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-3-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-4-1.png" width="504" /> ] - Industry equilibrium: firms earning normal `\(\pi=0, p=MC(q)=AC(q)\)` - Exogenous increase in market demand --- # Constant Cost Industry (No External Economies) IV .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-5-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-6-1.png" width="504" /> ] - **Short run `\((A \rightarrow B)\)`**: industry reaches new equilibrium - Firms charge higher `\(p^*\)`, produce more `\(q^*\)`, earn `\(\pi\)` --- # Constant Cost Industry (No External Economies) V .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-7-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-8-1.png" width="504" /> ] - **Long run `\((B \rightarrow C)\)`**: profit attracts entry `\(\implies\)` industry supply increases - No change in costs to firms in industry, firms enter until `\(\pi=0\)` at `\(p=AC(q)\)` - Firms must charge original `\(p^*\)`, return to original `\(q^*\)`, earn `\(\pi=0\)` --- # Constant Cost Industry (No External Economies) VI .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-9-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-10-1.png" width="504" /> ] - .red[Long Run Industry Supply] is perfectly elastic --- # Increasing Cost Industry (External Diseconomies) I .pull-left[ - .shout[Increasing cost industry] has *external _dis_economies*, costs rise for all firms in the industry as industry output increases (firms enter & incumbents produce more) - An *upward sloping long-run industry supply curve*! - Determinants: - Finding more resources in harder-to-reach places - Diminishing marginal products - Greater complexity and administrative costs at larger scales - Examples: oil, mining, particle physics ] .pull-right[ .center[   ] ] --- # Increasing Cost Industry (External Diseconomies) II .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-11-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-12-1.png" width="504" /> ] - Industry equilibrium: firms earning normal `\(\pi=0, p=MC(q)=AC(q)\)` --- # Increasing Cost Industry (External Diseconomies) III .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-13-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-14-1.png" width="504" /> ] - Industry equilibrium: firms earning normal `\(\pi=0, p=MC(q)=AC(q)\)` - Exogenous increase in market demand --- # Increasing Cost Industry (External Diseconomies) IV .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-15-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-16-1.png" width="504" /> ] - **Short run `\((A \rightarrow B)\)`**: industry reaches new equilibrium - Firms charge higher `\(p^*\)`, produce more `\(q^*\)`, earn `\(\pi\)` --- # Increasing Cost Industry (External Diseconomies) V .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-17-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-18-1.png" width="504" /> ] - **Long run**: profit attracts entry `\(\implies\)` industry supply will increase - **But more production increases costs `\((MC, AC)\)` for all firms in industry** --- # Increasing Cost Industry (External Diseconomies) VI .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-19-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-20-1.png" width="504" /> ] - **Long run `\((B \rightarrow C)\)`**: firms enter until `\(\pi=0\)` at `\(p=AC(q)\)` - Firms charge higher `\(p^*\)`, producer lower `\(q^*\)`, earn `\(\pi=0\)` --- # Increasing Cost Industry (External Diseconomies) VII .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-21-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-22-1.png" width="504" /> ] - .red[Long run industry supply curve] is upward sloping --- # Decreasing Cost Industry (External Economies) I .pull-left[ - .shout[Decreasing cost industry] has *external economies*, costs fall for all firms in the industry as industry output increases (firms enter & incumbents produce more) - A *downward sloping long-run industry supply curve*! - Determinants: - High fixed costs, low marginal costs - Economies of scale - Examples: geographic clusters, public utilities, infrastructure, entertainment - **Tends towards "natural" monopoly** ] .pull-right[ .center[   ] ] --- # Decreasing Cost Industry (External Economies) II .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-23-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-24-1.png" width="504" /> ] - Industry equilibrium: firms earning normal `\(\pi=0, p=MC(q)=AC(q)\)` --- # Decreasing Cost Industry (External Economies) III .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-25-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-26-1.png" width="504" /> ] - Industry equilibrium: firms earning normal `\(\pi=0, p=MC(q)=AC(q)\)` - Exogenous increase in market demand --- # Decreasing Cost Industry (External Economies) IV .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-27-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-28-1.png" width="504" /> ] - **Short run `\((A \rightarrow B)\)`**: industry reaches new equilibrium - Firms charge higher `\(p^*\)`, produce more `\(q^*\)`, earn `\(\pi\)` --- # Decreasing Cost Industry (External Economies) V .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-29-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-30-1.png" width="504" /> ] - **Long run**: profit attracts entry `\(\implies\)` industry supply will increase - **But more production lowers costs `\((MC, AC)\)` for all firms in industry** --- # Decreasing Cost Industry (External Economies) VI .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-31-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-32-1.png" width="504" /> ] - **Long run `\((B \rightarrow C)\)`**: firms enter until `\(\pi=0\)` at `\(p=AC(q)\)` - Firms charge higher `\(p^*\)`, producer lower `\(q^*\)`, earn `\(\pi=0\)` --- # Decreasing Cost Industry (External Economies) VII .pull-left[ <img src="external-economies_files/figure-html/unnamed-chunk-33-1.png" width="504" /> ] .pull-right[ <img src="external-economies_files/figure-html/unnamed-chunk-34-1.png" width="504" /> ] - .red[Long run industry supply curve] is downward sloping!