3.9 Firm's Supply Curve in Perfect Competition

Deriving the firm's supply curve

In the short run, a perfectly competitive firm's supply curve is the portion of its marginal cost (MC) curve that lies at or above the average variable cost (AVC) curve. Below AVC, the firm minimizes losses by shutting down rather than producing, since it can't cover variable costs. The firm chooses output where P = MC, as long as P ≥ AVC.

Shutdown vs. break-even points

The shutdown point occurs where P = minimum AVC — below this, the firm produces zero output. The break-even point occurs where P = minimum average total cost (ATC) — the firm earns zero economic profit here. Between these two points, the firm operates at a loss but still produces because it covers some fixed costs.

From firm to market supply

The short-run market supply curve is the horizontal summation of all individual firms' MC curves (above AVC) in the industry. As price rises, both existing firms move up their MC curves and, in the long run, new firms enter, shifting market supply further right until economic profits return to zero.

Key terms

Firm's short-run supply curve

The portion of the MC curve at or above minimum AVC.

Shutdown point

Price equals minimum AVC; below this, the firm produces zero output.

Break-even point

Price equals minimum ATC; the firm earns zero economic profit.

Why produce at a loss?

If P is between min AVC and min ATC, producing still covers variable costs plus part of fixed costs, minimizing losses.

Short-run market supply curve

The horizontal sum of all firms' MC curves (above AVC) in the industry.

Try an AP-style question

A competitive firm's short-run supply curve is its MC curve above…

1. maximum MC
2. minimum ATC
3. the origin
4. minimum AVC