Market supply curve
•The market supply curve shows the output levels (plotted on the x-axis) that firms in the market produce in aggregate corresponding to different values of the market price (plotted on the y-axis).
•Consider a market with n firms: firm 1, firm 2, firm 3, and so on.
•Suppose the market price is fixed at p.
•Then, the output produced by the n firms in aggregate is [supply of firm 1 at price p] + [supply of firm 2 at price p] + ... + [supply of firm n at price p].
•Thus the market supply at price p is the summation of the supplies of individual firms at that price
Market supply curve with two firms in the market
•Let us now construct the market supply curve geometrically with just two firms in the market: firm 1 and firm 2.
•The two firms have different cost structures.
•Firm 1 will not produce anything if the market price is less than p1
•Firm 2 will not produce anything if the market price is less than p2 .
•Assume also that p2 is greater than p1
The Market Supply Curve Panel
•(a) shows the supply curve of firm 1. Panel
•(b) shows the supply curve of firm 2.
•Panel (c) shows the market supply curve, which is obtained by taking a horizontal summation of the supply curves of the two firms.
•When the market price is strictly below p1 , both firms choose not to produce any amount of the good;
•Hence, market supply will also be zero for all such prices.
•When price greater than or equal to p1 but strictly less than p2 , only firm 1 will produce a positive amount of the good.
•Therefore, in this range, the market supply curve coincides with the supply curve of firm 1.
•For a market price greater than or equal to p2 , both firms will have positive output levels. For example, consider a
•At price p3, firm 1 supplies q3 units of output while firm 2 supplies q4 units of output. So, the market supply at price p3 is q5, where q5 = q3 + q4.
•We obtain Sm by taking a horizontal summation of the supply curves of the two firms in the market, S1 and S2.
Market supply curve and number of firms
•The market supply curve has been derived for a fixed number of firms in the market.
•As the number of firms changes, the market supply curve shifts as well.
•If the number of firms in the market increases (decreases), the market supply curve shifts to the right (left).