Question

What is the purely competitive firms’ short run supply curve? Use a Graph and explain what you are depicting.

Answer 1

A perfectly competitive firm's supply curve is that portion of its marginal cost curve that lies above the minimum of the average variable cost curve. A perfectly competitive firm maximizes profit by producing the quantity of output that equates price and marginal cost. As such, the firm moves along its positively-sloped marginal cost curve in response to changing prices.

All three curves (average total cost, average variable cost, and marginal cost) are U-shaped. The marginal cost curve is U-shaped as a direct consequence of increasing, then decreasing marginal returns. The marginal cost curve is a supply curve only because a perfectly competitive firm equates price with marginal cost. This happens only because price is equal to marginal revenue for a perfectly competitive firm.