After you have worked through this section of the learning unit, you should be able to:
- derive the supply curve for an individual firm under perfect completion
An individual firm under perfect competition is a price taker and changes in the market will influence its behaviour through changes in the price of the goods or services. In reaction to a change in the market price, the firm will change the quantity it produces.
What we can conclude from this is that an increase in the price leads to an increase in the quantity supplied. We have now provided an explanation for why the supply curve is upward sloping – in other words, why it is that an increase in price leads to an increase in the quantity supplied, and vice versa. One can also view this from another angle and argue that owing to the law of increasing marginal cost, a firm will only be willing to supply a higher quantity if it can obtain a higher price.
By adding all the different supply curves of firms together, one can obtain the market supply curve.
Study the graph below and answer the questions that follow:
- Which point is not part of the firm's supply curve?
- Which point is the shutdown point?
- Does the firm make an economic loss at point C?
- At which point on the supply curve does the firm make a normal profit?
- At which point on the supply curve does the firm make an economic profit?
- The supply curve runs from point ______ onwards.