Your Email

Pasword

First we understand the meaning of short run and the nature of short run supply curve of the firm-

Short run is a period in which fixed factors such as machinery and plant cannot be changed. The firm can increase output by increasing the quantities of variable factors only.

Short Run Supply Curve of the firm indicates the quantity which a firm is ready to produce and sell at different prices in the short run. Under perfect competition profit maximising firm produces that output where marginal cost is equal to price. It shows that firms, 'MC curve is itself firms' supply curve. The curve showing relationship between Marginal Cost (MC) and output is also the curve showing relationship between price and output.

Now we will discuss the nature of Short run supply curve of the industry in detail with figure-

In the short run, price must at least be equal to average variable cost. If price is less than average variable cost (AVC), than the firm will stop production totally. It indicates that in the short run supply curve of the firm is that portion of its marginal cost curve which lies above its average variable cost curve. This can be understand with the help of figure mentioned below as follows -

As shown in above figure -1, SMC is the short marginal cost curve of the firm while SAVC is the short run average variable cost curve of the firm. Here, if price is P₁, OQ₁ output is produced because its marginal cost that is (AQ₁) is equal to price OP₁.

Similarly, if price is P₂, OQ₂ output is produced because its marginal cost (BQ₂) is equal to price OP₂. At any price below OP₁, the firm will stop production because any price below OP₁ does not cover even average variable cost. It means total revenue will be less than total variable cost so that, if production is continued, total loss will be greater than what it would be when production is discontinued and stop. It clearly indicates that SMC lying above point A is the short run supply curve of the firm.

As shown in figure -2, SS is the short supply curve of the industry. It is obtained by horizontal summation of short run supply curves of the firms in the industry. It shows that at price OP₁, total supply in the market is OQ₃.

For eg- Suppose, if there are 100 firms in the industry, then at price OP₁, OQ₃ will be equal to OQ₁  x  100.

© www.newsandstory.com