Individual Supply Curve in the Short Run and Long Run - Online Tutor, Practice Problems & Exam Prep

In the short run, a firm continues production when the price exceeds average variable cost (AVC), forming its supply curve from the marginal cost curve above AVC. In the long run, a firm remains in the market when the price is above average total cost (ATC), shaping its supply curve from the marginal cost curve above ATC. Understanding these concepts is crucial for analyzing market behavior, including profit maximization and the implications of economic losses, as firms adjust their output based on cost structures and market prices.

Individual Firm Supply Curve in the Short Run

Alright, so now that we've discussed when the firm is going to produce in the short run and the long run, let's see what the firm's supply curve is going to look like in the short run and the long run. So remember, first let's talk about the short run. This is going to be the short run first here, short run, all right. Here in the short run, when is it that a firm does not shut down? A firm does not shut down; it stays open when the price is greater than the average variable cost, right? That's when they stay open, that's when they keep producing, right? What we're going to see is that the firm's short-run supply curve, when we're dealing with perfect competition, is going to be the portion of the marginal cost curve above average variable cost, okay? That is where we produce in the short run, right? That's how we discuss it. At any price above that minimum AVC, any of those high prices, we are going to produce, maybe at a loss, maybe at a profit, but we are going to produce at any price above minimum AVC, right? So that's what we see here on this left-hand graph, right? On the left-hand graph, I have all of our curves showing, and you'll see, right? If we had a price right here, let's say this price right here, p₁ that I'm going to put, we would produce right, we would produce this quantity where the marginal revenue equals the marginal cost. And anywhere, right, any other price I could have put a little bit higher, a little bit lower, as long as it's above that AVC, we're going to keep producing as they cross right? It's going to be all these points where marginal revenue equals marginal cost, right? But if we were at a point below, right, if we were at this price down here, p₂, well we wouldn't produce, right? We're not covering our average variable cost, so we don't produce. That's why I've got that section right here, this little U-shaped section of the marginal cost curve, kind of shaded out, and then we've got this section right here, this red section over on the left-hand side, that's a quantity of 0, right? So any price up to that minimum AVC, we are going to have a quantity of 0. So that's why we get this kind of almost funky shape. So I took all those cost curves out. I went over here to the right-hand side, and that's kind of what the supply curve looks like. So this would be the firm supply curve in the short run, right? Short run. Alright? So what we see is that it's at any point where the price is greater than the average variable cost, we are going to produce, right, and that's how we have all these little points. Points points points points all the way up the marginal cost curve, and that's how our supply curve gets formed, right? So this black dot right here, that's our minimum AVC. Minimum Average Variable Cost, okay. AVC right there behind me. Alright, cool. Let's go ahead and discuss what the supply curve looks like in the long run. Let's do it in the next video.

Individual Firm Supply Curve in the Long Run

Alright, so now let's discuss the long run, right. So this is going to be long run here. Oops, let me go to red. Long run. Okay? So a firm does not exit the market when the price is above the ATC, right? So when p > ATC, we stay in the market, right? We're covering our average total cost, we're going to make a profit, okay? So what we're going to see is that the firm is only producing in the long run when we're at least at ATC, right? So it's going to be the portion of the marginal cost curve above ATC in the long run. Notice how similar that is to the short run, right? The difference was just AVC, the section above AVC.

Alright, so let's see how this makes sense, right? If we pick the price, say something like this, p1 right here, well, we would produce at this quantity. Right? We would produce this quantity and we would make a profit of the amount above average total cost right? The profit would be something like this. So this area right here would be our profit, right? Oops. Right. Okay. So I'm going to erase that and so that's the whole point here, right? We're covering our average total cost so we're going to produce just like we saw in the short run, right, with the average variable cost. So here we would produce, right? Any of these prices, any price level as we move up and up and up, we're going to produce at all these price levels, right? So that's kind of how we get this curve, right? That's where the curve comes from and if we had some price below that shutdown point or, excuse me, the exit point in this case, then we would not produce, right? We would not produce here where the marginal cost touches marginal revenue, right? This would be the point, but it's below average total cost so we're out, right? We're exiting the market and we're going to produce 0 over here. That's why we've got this straight line going up at 0 all the way up to that average total cost point.

So similar to what we saw with the short run, here we've got our long run firm supply. Okay? And that's going to have this zero portion all the way up to the minimum ATC, right? Right there and then we start producing anywhere above that. Cool? Alright. So that's pretty simple, I mean I just wanted to show it to you just so you can see how that supply curve is formed, right? We've got this kind of funky shape where we produce 0 all the way up to a point and then from that point we start using the marginal cost curve to create our supply curve. Alright, so that's what the firm supply looks like. Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is the difference between the short run and long run supply curves for a firm?

In the short run, a firm's supply curve is the portion of the marginal cost (MC) curve that lies above the average variable cost (AVC). This means the firm will produce as long as the price (P) is greater than AVC. In the long run, the supply curve is the portion of the MC curve above the average total cost (ATC). Here, the firm will produce only if the price is greater than ATC. The key difference is that in the short run, the firm covers variable costs, while in the long run, it must cover total costs to stay in the market.

How does a firm decide whether to produce or shut down in the short run?

In the short run, a firm decides to produce if the price (P) is greater than the average variable cost (AVC). This is because the firm can cover its variable costs and contribute to fixed costs, even if it incurs a loss. The decision rule is: produce if P > AVC, and shut down if P < AVC. The firm's short-run supply curve is the portion of the marginal cost (MC) curve above the AVC.

What determines a firm's supply curve in the long run?

In the long run, a firm's supply curve is determined by the portion of the marginal cost (MC) curve that lies above the average total cost (ATC). The firm will produce if the price (P) is greater than ATC, as it can cover all its costs and make a profit. If P is less than ATC, the firm will exit the market. Thus, the long-run supply curve is the MC curve above the ATC.

Why is the marginal cost curve important in determining the supply curve?

The marginal cost (MC) curve is crucial in determining the supply curve because it represents the additional cost of producing one more unit of output. In both the short run and long run, the firm's supply curve is derived from the MC curve. In the short run, the supply curve is the MC curve above the average variable cost (AVC), and in the long run, it is the MC curve above the average total cost (ATC). This relationship helps firms decide the optimal level of production based on market prices.

What happens to a firm's supply curve if the average variable cost increases?

If the average variable cost (AVC) increases, the firm's short-run supply curve will shift upward. This is because the minimum AVC point, where the firm starts producing, will be higher. Consequently, the firm will need a higher price to cover the increased AVC and continue production. The long-run supply curve, however, remains unaffected by changes in AVC, as it depends on the average total cost (ATC).