David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

8.2 A perfectly competitive firm's supply decision
Market
A single firm
Figure 8.4
Entry to and exit from the industry
Q
Q* Q
..
cu
"'
'i:
a..
SRSS
Taken from the two previous figures, the
short-run supply curve SRSS is the firm's
SMC curve above A and the long-run
supply curve LRSS is the firm's LMC curve
above C. P, is the shutdown price in the
short run and P3 the entry and exit price
in the long run. If the firm happens to
begin with the stock of fixed factors it
would choose at the lowest point on its
LAC curve, then C will actually lie on the
SRSS curve.
Q3
Output
Figure 8.5
Short- and long-run supply curves of the competitive firm
by the shift from S1 to S2 in Figure 8.4. Since the supply has increased, for a given market demand, the
market price will decrease. This will reduce the profits that firms in the market can make.
When will entry into the market stop? When the last firm to enter makes zero
profits. This last firm to enter is called the marginal firm. In Figure 8.4, entry stops
when the market price is P2• That price will be equal to the minimum LRAC for all
firms and so each firm will make zero profit. No other firm will find entry profitable
since there are no profits to steal. When the market price is above P2, entry is
profitable. At P2, entry stops and the market is in long-run equilibrium.
The marginal firm is the
last firm to enter the market;
it makes zero long -run profits.
Supply decisions of a competitive firm
Figure 8.5 summarizes the preceding discussion. For each level of fixed factors there is a different SMC
curve and short-run supply curve SRSS. The long-run supply curve LRSS is flatter than SRSS because extra
175