•A firm’s ‘supply’ is the quantity that it chooses to sell at a given price, given
•technology, and given the prices of factors of production.
•A table describing the quantities sold by a firm at various prices, technology and prices of factors remaining unchanged, is called a supply schedule.
•We may represent the information as a graph, called a supply curve.
•The supply curve of a firm shows the levels of output (plotted on the x-axis) that the firm chooses to produce corresponding to different values of the market price (plotted on the y-axis),
•It is assumed that the technology and prices of factors of production remains unchanged.
•Short run supply curve and the long run supply curve are represented separately.
Short Run Supply Curve of a Firm
•We shall split this derivation into two parts.
1. We first determine a firm’s profit-maximising output level when the market price is greater than or equal to the minimum AVC.
2. We determine the firm’s profit-maximising output level when the market price is less than the minimum AVC.
Case 1: Price is greater than or equal to the minimum AVC
•Suppose the market price is p1, which exceeds the minimum AVC.
•We start out by equating p1 with
•SMC on the rising part of the SMC curve; this leads to the output level q1.
•The AVC at q1 does not exceed the market price, p1.
•Thus, all three conditions highlighted in for perfect competition are satisfied at q1.
•Hence, when the market price is p1, the firm’s output level in the short run is equal to q1.
Case 2: Price is less than the minimum AVC
•Suppose the market price is p2, which is less than the minimum AVC.
•According to the condition 3 if a profit-maximising firm produces a positive output in the short run, then the market price, p2, must be greater than or equal to the AVC at that output level.
•But in Figure, for all positive output levels, AVC strictly exceeds p2.
•Hence, if the market price is p2, the firm produces zero output.
•Combining cases 1 and 2, we reach to the following conclusion.
•A firm’s short run supply curve is the rising part of the SMC curve from and above the minimum AVC together with zero output for all prices strictly less than the minimum AVC.
•In figure, the bold line represents the short run supply curve of the firm.