Short-run supply curve

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Definition

To define a short-run supply curve, we need to fix the following backdrop:

  • The specific good, service, or commodity being produced.
  • A unit for measuring the quantity of the commodity.
  • A unit for measuring price.
  • A convention for whether sales taxes are included in the stated price.
  • A certain firm or set of firms who are the potential producers/sellers of the good.
  • The fixed costs incurred by the firm, which typically cannot be changed in the short run.
  • An economic backdrop that includes all the other determinants of supply other than the unit price. These are primarily the prices of various factors of production.

With this backdrop, the short-run supply curve is a curve drawn with:

  • The vertical axis is the price axis, measuring the price per unit of the good
  • The horizontal axis is the quantity axis, measuring the total quantity supplied at the given price by the total of all the economic actors chosen above.

Note that the short-run supply curve makes sense ceteris paribus -- keeping the other determinants of supply constant.

Determination

For a firm in a perfectly competitive market

Further information: determination of quantity supplied by firm in perfectly competitive market

If the firm operates in a perfectly competitive market, then it is a price-taker, i.e., it has no say about the price of the good; however, it can control the quantity that it produces. In such a case, the short-run supply curve looks like the part of the marginal cost curve that lies to the right of the minimum average variable cost point. We consider three examples:

Marginalcostcurveasshortrunsupplycurve.png

In the first example, the marginal cost is increasing, starting at zero. In this case, the firm's reservation price (i.e., the minimum price above which it produces a nonzero quantity) is zero and the marginal cost curve is the same as the short-run supply curve.

Marginalcostcurveasshortrunsupplycurvewithpositivereservationprice.png

In the second example, the marginal cost is increasing, but not starting at zero. The minimum, starting value here becomes the reservation price. Below the reservation price, the firm stays idle. The marginal cost curve again coincides with the short-run supply curve.

Mc-avc-complicated.png

In the third example, the marginal cost (MC) is initially decreasing, then increasing. The average variable cost (AVC) curve starts out with the marginal cost curve, then decreases but above the MC curve, and then attains its minimum at the point where the curves cross. The point where the curves cross is the minimum AVC value and is the firm's reservation price. The short-run supply curve is the part of the marginal cost curve that lies to the right of the vertical line for minimum AVC.