Figure 9-5 The Derivation of the Supply Curve for a Competitive Firm
Short-Run Supply Curves
Now that we know how a perfectly competitive firm determines its profit-
maximizing level of output, we can derive its supply curve. Once we have
derived the individual firm’s supply curve, we can derive the supply curve
for the entire market.
The Supply Curve for One Firm
A competitive firm’s supply curve is derived in part (i) of Figure 9-5
which shows a firm’s marginal cost curve and four alternative prices.
What we are trying to derive is a supply curve that shows the quantity of
output that the firm will supply at each price. For prices below average
variable cost, the firm will supply zero units (Rule 1). For prices above the
minimum of average variable cost, the competitive firm will choose its
level of output to equate price and marginal cost (Rule 2). This behaviour
leads to the following conclusion:
A competitive firm’s supply curve is given by the portion of its marginal cost curve that is
above its average variable cost curve.