The Theory of the Firm under Perfect Competition | Class 12 Economics Notes

4.4 SUPPLY CURVE OF A FIRM

A firm's supply curve shows the quantity of output it chooses to produce and sell at different market prices, holding technology and input prices constant. The supply schedule is a tabular representation of this relationship, while the supply curve is its graphical form. The supply curve differs in the short run and long run due to different cost structures and production constraints. In the short run, the supply curve is derived from the firm's short run marginal cost (SMC) curve and average variable cost (AVC) curve. When the market price p is greater than or equal to the minimum AVC, the firm produces output where p = SMC on the rising part of the SMC curve. If p is less than minimum AVC, the firm produces zero output. Hence, the short run supply curve is the rising portion of the SMC curve above minimum AVC plus zero output for prices below minimum AVC. In the long run, the supply curve is derived from the long run marginal cost (LRMC) and long run average cost (LRAC) curves. The firm produces output where p = LRMC on the rising part of LRMC if p ≥ minimum LRAC; otherwise, it produces zero. Therefore, the long run supply curve is the rising part of LRMC above minimum LRAC plus zero output below minimum LRAC. The shut down point in the short run is the minimum AVC point; in the long run, it is the minimum LRAC point. The break-even point is where the firm earns normal profit, i.e., zero economic profit, at minimum average cost.

📊 Diagram: See figure_9: Fig. 4.7 showing output levels at prices p1 and p2; figure_11: Fig. 4.8 short run supply curve; figure_12: Fig. 4.9 long run supply curve; figure_13: Fig. 4.10 long run supply curve bold line.

🧪 Activity: No specific activity in this section.

🔗 Connection: Leads to discussion of determinants of supply curve in section 4.5.