The nature of the research‐induced supply shift

Differences among firms in a competitive industry can affect the shape of the industry supply curve. It is necessary to know how both production costs and rents are affected by research. Industry response to research will be different depending upon whether entry occurs. If the effect of entry is ignored, then the price decline from research will be overstated. Industry marginal returns can be positive with purely yield‐increasing research, even when industry demand is inelastic. Standard formulas for calculating producer surplus based on linear industry supply and demand curves are strictly valid only if the analysis is restricted to short‐run equilibrium behaviour