A Competitive Short Run Supply Curve of Firm

* Observations:

- 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

* Observations:

- 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. 

* Observation:

- 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