Question

What is the supply curve of a firm in the short run?

Answer 1

The short run supply curve of perfect competitive firm is the summation of the upward sloping portion of SMC (above the minimum point of SAVC), when price ≥ min SAVC, and vertical portion of price-axis, when price < min SAVC.

Stage 1

When the price is greater than or equal to minimum of SAVC, i.e., P ≥ min SAVC.

At the market price OP, the three following conditions for equilibrium are fulfilled:

1. MC = MR

2. MC is upward sloping

3. Price exceeds the minimum of SAVC

At this market price the firm is producing profit maximising output Oq₁.

In this case, the supply curve of the firm is regarded as the upward sloping part of SMC (above the minimum point of SAVC), i.e. SS. When the price is greater than or equal to minimum of SAVC, the supply curve is indicated by SS.

Stage 2

When the price is less than the minimum of SAVC

Let us suppose that the firm is facing price OP₁ that is lesser than the minimum of SAVC. At this price, the firm cannot continue production as it cannot even cover up its variable costs and thereby incurs losses, which implies that the firm would produce nothing. Thus, it will incur loss that will be equivalent to its fixed costs. It will be lesser compared to the losses associated with producing any positive output level. Thus, the firm will not produce anything at this price and thereby the quantity supplied will be zero. The firm’s supply curve is indicated by the darkened vertical line S₁S₁.

Therefore, the short run supply curve of perfect competitive firm is (SS + S₁S₁).