A Competitive Short Run Supply Curve of Firm
- P = MR
- MR = MC
- P = MC
* Supply is amount of output for every possible price. Thus:
- If P = P1, then q = q1
- If P = P2, then q = q2
- Supply is upward sloping because of diminishing returns.
- Higher price compensates firm for the higher cost of additional output and increases total profit as it applies to all the units.
* Firm's Response to an Input Price Change
- When price of firm's product changes, firm changes its output level, such that the marginal cost(MC) of production remains equal to price.
The Short Run Production of the Petroleum Products
* Stepped SMC illustrates a different production (cost) process at several capacity levels.
- With stepped marginal cost (MC) function, small changes in price may not trigger change in output
* The short run market supply curve shows amount of output which the industry will produce in the short run for every possible price.
* Consider, a competitive market having three firms:
Industry Supply in Short Run