Supply Curve Of A Firm | The Theory of the Firm Under Perfection Competition | Notes | Summary - Zigya

Book Store

Download books and chapters from book store.
Currently only available for.
CBSE

Previous Year Papers

Download the PDF Question Papers Free for off line practice and view the Solutions online.
Currently only available for.
Class 10 Class 12
Advertisement

The Theory Of The Firm Under Perfect Competition

Quickly browse through questions and notes on related topics. You can also download and read this topic offline.


Advertisement

Supply Curve Of A Firm

The supply curve of a firm shows the levels of output that the firm chooses to produce corresponding to different values of the market price. It can further be classified into short-run and long-run supply curves.

Long Run Supply Curve Of A Firm

Case I, 
Price greater than or equal to minimum LRAC.


The figure shows the output levels chosen by a profit-maximising firm in the long run for two values of the market price: p1 and p2. When the market price is p1, the output level of the firm is q1; when the market price is p2, the firm produces zero output.

Case II,
Price less than the minimum LRAC.

The long run supply curve of a firm, which is based on its long run marginal cost curve (LRMC) and long run average cost curve (LRAC), is represented by the bold line.

Short Run Supply Curve Of A Firm

Case 1Price is greater than or equal to the minimum AVC.


The figure shows the output levels chosen by a profit-maximising firm in the short run for two values of the market price: p1 and p2. When the market price is p1, the output level of the firm is q1; when the market price is p2, the firm produces zero output.

Case 2: Price is less than the minimum AVC:

In the figure, the rising part of the SMC curve from and above the minimum AVC is represented by the bold line is the short run supply curve of a firm.

The Normal Profit And Break-Even Point

Normal Profit: The profit level that is just enough to cover the explicit costs and opportunity costs of the firm is called the normal profit. 
Break Even Point: The point on the supply curve at which a firm earns normal profit is called the break-even point of the firm. The point of minimum average cost at which the supply curve cuts the LRAC curve (in short run, SAC curve) is therefore the break-even point of a firm.

The Shut Down Point

A business needs to make at least normal profit, in the long run, to justify remaining in an industry but in the short run, a firm will produce as long as the price per unit > or equal to average variable cost (AR = AVC). This is called the shutdown price in a competitive market.

Advertisement