when firms exit a perfectly competitive industry, the market supply curve shifts to the left

At OP price, supply of industry is 100 x M = 100M. It is because all firms have identical costs. Here, we have assumed that different firms in the industry are producing identical products.Įach firm at OP price is producing OM output. This can be made clear with the help of a Fig.

That way, supply curve of an industry is a lateral summation of all firms. (ii) Short Run Supply Curve of an Industry:Īn industry is a blend of firms producing homogeneous goods. This firm’s short run supply curve starts from A upwards i.e., thick line AB. If price goes up to OP1, the firm will produce OM1 output. In this case, firms’ marginal revenue and marginal cost cut each other at A, OM is equilibrium output. At price less than OP, the firm will not be covering its average variable cost. 1 it is clear that there is no supply if price is below OP. Bilas has defined it in simple words, “The Firm’s short period supply curve is that portion of its marginal cost curve that lies-above the minimum point of the average variable cost curve.” However, short run supply curve of a firm can be shown with the help of fig. Ferguson, “The short run supply curve of a firm in perfect competition is precisely its Marginal Cost Curve for all rates of output equal to or greater than the rate of output associated with minimum average variable cost.” Short run supply curve of a perfectly competitive firm is that portion of marginal cost curve which is above average variable cost curve. Under perfect competition average revenue is equal to marginal revenue, so the firm will produce up to that point where marginal revenue and marginal cost are equal. Thus a firm will continue supplying the commodity till marginal cost is equal to price or average revenue. That is why in the short run, the firm will supply commodity till price is either greater or equal to average variable cost.

That way, if the firm shuts down, it has to bear fixed costs. Short run is a period in which supply can be changed by changing only the variable factors, fixed factors remaining the same. Short Run Supply Curve (i) Short Run Supply Curve of a Firm:

When firms exit a perfectly competitive industry, the market supply curve shifts to the left