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Short Run & Long Run Supply Curve Under Perfect Competition

1) The short run supply curve of an individual firm is the portion of its marginal cost curve above its average variable cost curve, as a firm will produce where price equals marginal cost as long as it covers its average variable costs. 2) The short run supply curve of a perfectly competitive industry is the horizontal summation of the individual firm supply curves, as the industry output is the sum of all firms' outputs at a given price. 3) In the long run, all factors of production can be adjusted, so a firm's long run supply curve is its marginal cost curve above the minimum of its average cost curve, where it produces at minimum average cost.

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Jahanzaib Ahmed
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3K views4 pages

Short Run & Long Run Supply Curve Under Perfect Competition

1) The short run supply curve of an individual firm is the portion of its marginal cost curve above its average variable cost curve, as a firm will produce where price equals marginal cost as long as it covers its average variable costs. 2) The short run supply curve of a perfectly competitive industry is the horizontal summation of the individual firm supply curves, as the industry output is the sum of all firms' outputs at a given price. 3) In the long run, all factors of production can be adjusted, so a firm's long run supply curve is its marginal cost curve above the minimum of its average cost curve, where it produces at minimum average cost.

Uploaded by

Jahanzaib Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Short run & long run supply curve under perfect competition

Supply curve can be divided into two parts as:


• Short run supply curve
• Long run supply curve

Short Run Supply Curve


(i) Short Run Supply Curve of a Firm:
Short run is a period in which supply can be changed by changing only the variable
factors, fixed factors remaining the same. That way, if the firm shuts down, it has
to bear fixed costs. That is why in the short run, the firm will supply commodity
till price is either greater or equal to average variable cost. Thus a firm will
continue supplying the commodity till marginal cost is equal to price or average
revenue. Under perfect competition average revenue is equal to marginal revenue,
so the firm will produce up to that point where marginal revenue and marginal cost
are equal.

Short run supply curve of a perfectly competitive firm is that portion of marginal
cost curve which is above average variable cost curve. According to C.E.
Ferguson, “The short run supply curve of a firm in perfect competition is precisely
its Marginal Cost Curve for all rates of output equal to or greater than the rate of
output associated with minimum average variable cost.”
Prof. Bilas has defined it in simple words, “The Firm’s short period supply curve is
that portion of its marginal cost curve that lies-above the minimum point of the
average variable cost curve.

In above diagram it is clear that there is no supply if price is below OP. At price
less than OP, the firm will not be covering its average variable cost. At OP price,
OM is the supply. In this case, firms’ marginal revenue and marginal cost cut each
other at A, OM is equilibrium output. If price goes up to OP1, the firm will
produce OM1 output. This firm’s short run supply curve starts from A upwards
i.e., thick line AB.

(ii) Short Run Supply Curve of an Industry:


An industry is a blend of firms producing homogeneous goods. That way, supply
curve of an industry is a lateral summation of all firm.

Here, we have assumed that different firms in the industry are producing identical
products.

Each firm at OP price is producing OM output. It is because all firms have


identical costs. At OP price, supply of industry is 100 x M = 100M.

Similarly at OP1 price, all the firms of industry are producing 100
xM1 =100M1 quantity of output. These quantities will be called supply or output of
industry. SS is the supply curve of industry. Point E shows that at OP price firm’s
supply is OM and an industry’s total supply is 100 × M = 100M.
At OP1 price, firm’s supply is OM1 and industry’s supply is 100M). We get
industry’s supply curve by joining points E and E1.
Thus, under perfect competition, lateral summation of that part of short run
marginal cost curves of the firms which lie above the average variable cost
constitutes the supply curve of the industry. According to Stonier and Hague,
“short run supply curve of a competitive industry will always slope upwards since
the short run marginal cost curve of the industrial firms always slope upward.”

Long Run Supply Curve:


Long run supply curve can also be analyzed from firm and industry’s point of
view:
1. Long Run Supply Curve of a Firm:
Long run is a period in which supply can be changed by changing all the factors of
production. There is no distinction between fixed and variable factors. In the long
run, firm produces only at minimum average cost. In this situation, long run
marginal cost, marginal revenue, average revenue and long run average cost are
equal i.e., LMCMR (= AR)LAC (minimum). The firm is enjoying only normal
profits.

So that position of marginal cost curve will determine the supply curve which is
above the minimum average variable cost. The point where minimum average cost
is equal to marginal cost is called optimum production. Thus Long Run Supply
Curve of a firm is that portion of its marginal cost curve that lies above the
minimum point of the average cost curve.
In above graph the firm is in equilibrium at point E where MRLMC (=AR). AC is
minimum corresponding to this point. This point E is also called optimum point
because at this point MR=LMCAR minimum LAC. That portion of LMC which is
above E is called long run supply curve.

2. Long Run Supply Curve of an Industry:

In the long run, industry’s supply curve is determined by the supply curve of firms
in the long run. Long run supply curve in the long run is not lateral summation of
the short run supply curves. Industry’s long run supply curve depends upon the
change in the optimum size of firms and change in the number of firms.

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