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3 THE FIRM’S SHUT-DOWN DECISION (4 of 4)

3 THE FIRM’S SHUT-DOWN DECISION (4 of 4)

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APPLICATION 3

STRADDLING THE ZINK COST CURVE
APPLYING THE CONCEPTS #3: What is the shut down price?
Zinc is a vital input to the production of steel. Because the cost of mining zinc varies from one mine to another, the shutdown price varies too. The world price of
zinc decreased from roughly $2,300 per ton in 2010-2011 to $1,900 in early 2012.
The lower price was below the shutdown prices of Alcoa’s mines in Italy and Spain: at a price of $1,900, the total revenue from the mines was less than the
variable cost of operating the mines.
The shutdown of Alcoa’s mines decreased mining output by 531,000 tons. Although mines with lower production costs continued mining at a price of $1,900,
many mines have shutdown prices in the range $1,500 to $1,900, and will shut down if the price continues to drop.

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24.4 SHORT-RUN SUPPLY CURVES (1 of 4)

The Firm’s Short-Run Supply Curve
Short-run supply curve
A curve showing the relationship between the market price of a product and the quantity of output supplied by a firm in the short run.

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24.4 SHORT-RUN SUPPLY CURVES (2 of 4)

The Firm’s Short-Run Supply Curve
In Panel A, the firm’s short-run supply curve is the part of the marginalcost curve above the shut-down price.
In Panel B, there are 100 firms in the market, so the market supply at a
given price is 100 times the quantity supplied by the typical firm. At a
price of $7, each firm supplies 6 shirts per minute (point b), so the
market supply is 600 shirts per minute (point f)

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24.4 SHORT-RUN SUPPLY CURVES (3 of 4)

The Short-Run Market Supply Curve
Short-run market supply curve
A curve showing the relationship between market price and the quantity supplied in the short run.

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24.4 SHORT-RUN SUPPLY CURVES (4 of 4)

Market Equilibrium
In Panel A, the market demand curve intersects the short-run
market supply curve at a price of $7.
In Panel B, given the market price of $7, the typical firm satisfies
the marginal principle at point b, producing six shirts per minute.
The $7 price equals the average cost at the equilibrium quantity,
so economic profit is zero, and no other firms will enter the
market.

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APPLICATION 4

THE SHORT RUN SUPPLY CURVE FOR CARGO
APPLYING THE CONCEPTS #4: Why is the short-run supply curve positively sloped?
Consider the supply of shipping services. The law of supply suggests that as the price of shipping increases, the quantity of shipping services will increase. The
figure below shows the supply curve for shipping services.
At a relatively low freight rate of $2 per ton, only the most efficient ships operate, and they economize on fuel by traveling at a slow speed. As a result, the
annual quantity of shipping services is relatively low (70 units per year).
At an intermediate freight price of $3 per ton, more ships are engaged: less efficient ships join the fleet. In addition, all the ships travel at a greater speed, using
more fuel in the process. The combination of more ships and faster travel increases the quantity of shipping services provided (85 units per year).
At a high freight rate of $7 per ton, all the ships operate and run at full speed, and the quantity of shipping services is 96 units per year.

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24.5 THE LONG-RUN SUPPLY CURVE FOR AN INCREASING-COST
INDUSTRY (1 of 5)
Long-run market supply curve
A curve showing the relationship between the market price and quantity supplied in the long run.

Increasing-cost industry
An industry in which the average cost of production increases as the total output of the industry increases; the long-run supply curve is
positively sloped.

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24.5 THE LONG-RUN SUPPLY CURVE FOR AN INCREASING-COST
INDUSTRY (2 of 5)
The average cost of production increases as the total output increases, for two reasons:
Increasing input price. As an industry grows, it competes with other industries for limited amounts of various inputs, and this competition
drives up the prices of these inputs.
Less productive inputs. A small industry will use only the most productive inputs, but as the industry grows, firms may be forced to use
less productive inputs.

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24.5 THE LONG-RUN SUPPLY CURVE FOR AN INCREASING-COST
INDUSTRY (3 of 5)
Production Cost and Industry Size

TABLE 24.4 Industry Output and Average Production Cost
Number of Firms

Industry Output

Shirts per Firm

Total Cost for Typical Firm

Average Cost per Shirt

100

600

6

$42

$7

200

1,200

6

60

10

300

1,800

6

78

13

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24.5 THE LONG-RUN SUPPLY CURVE FOR AN INCREASING-COST
INDUSTRY (4 of 5)
Drawing the Long-Run Market Supply Curve
The long-run market supply curve shows the relationship between
the price and quantity supplied in the long run, when firms can enter
or leave the industry.
At each point on the supply curve, the market price equals the longrun average cost of production. Because this is an increasing-cost
industry, the long-run market supply curve is positively sloped.

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24.5 THE LONG-RUN SUPPLY CURVE FOR AN INCREASING-COST
INDUSTRY (5 of 5)
Examples of Increasing-Cost Industries: Sugar and Apartments
The sugar industry is an example of an increasing-cost industry. As the price increases, sugar production becomes profitable in areas where production costs
are higher, and as these areas enter the world market, the quantity of sugar supplied increases.
The market for apartments is another example of an increasing-cost industry with a positively sloped supply curve. Most communities use zoning laws to
restrict the amount of land available for apartments. As the industry expands by building more apartments, firms compete fiercely for the small amount of
land zoned for apartments. Housing firms bid up the price of land, increasing the cost of producing apartments. Producers can cover these higher
production costs only by charging higher rents to tenants. In other words, the supply curve for apartments is positively sloped because land prices increase
with the total output of the industry, pulling up average cost and necessitating a higher price for firms to make zero economic profit.

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