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"The rising portion of the SMC curve is the firm supply curve of competitive firm". Explain. |
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Answer» Solution :(i) The supply curve of the firm tells us the quantity of the product that a firm is willing and able to produce and sell at each possible price. (ii) The firm will produce and supply an output at the point at which Price is equal to Marginal cost. The derivation of the supply curve is explained with the help of the given figure.  (iii) The SMC of the firm is given. Let us initially assume that the market price is `OP_(1)`. The firm will produce and supply an output of `OX_(1)`because at `e_(1)`, price = MC. (`OX_(1)` is the equilibrium output supplied, as MC - MR and MC cuts MR from below). (IV) Suppose the market price RISES to `OP_(2)`, then the firm will produce and sell `OX_(2)` level, because at `e_(2)` level price = MC = MR. (v) Similarly, as market price increases to `OP_(3)`, quantity supplied increases to `OX_(3)`. However, the firm will not supply any quantity if the price falls below OP. (vi) At OP price, the firm will produce and sell OX output. For any price below OP the firm will not produce and sell ANYTHING. The supply will be zero UNITS. Having the above information, the supply schedule can be determined as, `{:("Price of Product","Units Supplied"),(OP,OX),(OP_(1),OX_(1)),(OP_(2),OX_(2)),(OP_(3),OX_(3)):}` (vii) If the market price falls below theminimum of the SAVC, the supply curve jumps to the small segment (OP) on the vertical axis at which there is zero supply. Therefore, two discontinuous [(OP) + (e.s)] pieces define the short run supply curve for the perfectly competitive firm. |
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