AP_Krugman_Textbook

At a price below $10, no farms will produce. At a price of more than $10, each farm

will produce the quantity of output at which its marginal cost is equal to the market

price. As you can see from Figure 59.2, this will lead each farm to produce 4 bushels if

the price is $14 per bushel, 5 bushels if the price is $18, and so on. So if there are 100 or-

ganic tomato farms and the price of organic tomatoes is $18 per bushel, the industry as

a whole will produce 500 bushels, corresponding to 100 farms × 5 bushels per farm.

The result is the short-run industry supply curve,shown as Sin Figure 60.1. This

curve shows the quantity that producers will supply at each price, taking the number of

farms as given.

600 section 11 Market Structures: Perfect Competition and Monopoly

figure 59.2

The Short-Run Individual

Supply Curve

When the market price equals or ex-

ceeds Jennifer and Jason’s shut-down

priceof $10, the minimum average

variable cost indicated by point A,they

will produce the output quantity at

which marginal cost is equal to price.

So at any price equal to or above the

minimum average variablecost, the

short-run individual supply curve is the

firm’s marginal cost curve; this corre-

sponds to the upward-sloping segment

of the individual supply curve. When

market price falls below minimum av-

erage variable cost, the firm ceases op-

eration in the short run. This corresponds

to the vertical segment of the individual

supply curve along the vertical axis.

210 76543 3.5

$18

16

14

12

10

Price, cost

of bushel

Quantity of tomatoes (bushels)

MC

ATC

AVC

C

B

A

E

Shut-down

price

Short-run

individual

supply curve

Minimum average

variable cost

figure 60.1

The Short-Run Market

Equilibrium

The short-run industry supply curve, S,is the

industry supply curve taking the number of

producers—here, 100—as given. It is gener-

ated by adding together the individual supply

curves of the 100 producers. Below the shut-

down price of $10, no producer wants to pro-

duce in the short run. Above $10, the short-run

industry supply curve slopes upward, as each

producer increases output as price increases.

It intersects the demand curve, D,at point

EMKT, the point of short-run market equilib-

rium, corresponding to a market price of $18

and a quantity of 500 bushels.

0 200 300 400 500 600 700

$26

22

18

14

10

Price, cost

of bushel

Quantity of tomatoes (bushels)

D

Short-run industry

supply curve, S

EMKT

Shut-down

price

Market

price

The short-run industry supply curve
shows how the quantity supplied by an
industry depends on the market price, given a
fixed number of firms.