It is the portion of a competitive firm's marginal cost curve that lies above he minimum possible point of its AVC curve. Therefore, the MC curve gives the relationship between price and quantity supplied by the competitive firm.
Short run supply curve slope upward because the firm MC tend to increase as output is increased. At any price below minimum possible AVC quantity supplied in the short run is zero. To determine the quantity supplied at any price greater than the minimum possible AVC, draw a horizontal line from that price to marginal cost curve. Dropping a vertical line to the horizontal axis gives the quantity supplied at that price.
At a price P1> AVC quantity supplied is Q1. At a higher price P2 quantity is Q2.
To induce a profit maximization firm to supply more output, market price should rise. When the market price increases, MR would exceed MC at a current output. Therefore, the firm finds it profitable to increase quantity supplied at the new higher price and as a result increases MC to the point at which it equals that price.
The determinants of market supply.
At a price P1> AVC quantity supplied is Q1. At a higher price P2 quantity is Q2.
To induce a profit maximization firm to supply more output, market price should rise. When the market price increases, MR would exceed MC at a current output. Therefore, the firm finds it profitable to increase quantity supplied at the new higher price and as a result increases MC to the point at which it equals that price.
The determinants of market supply.
- The number of firms in the industry
- The average size of firms in the industry measured by quantity of fixed inputs employed (for example average of factories for production capacity).
- The price of variable inputs used by firms in the industry.
- The technology employed in the industry
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