[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

COST OR PRICE (DOLLARS PER UNIT)
c min = p
Firm
supply
curve
A
Marginal
cost curve
Average
cost curve
COST OR PRICE (DOLLARS PER UNIT)
p
Firm
supply
curve
B
Marginal
cost curve
Average
variable
cost curve
Average
cost curve
OUTPUT
OUTPUT
FIGURE 7.6
THE SUPPLY CURVE FOR A FIRM
Panel A shows that for a firm contemplating entry into the market, supply is zero up to a
critical price, equal to the firm’s minimum average cost, after which the firm’s supply
curve coincides with the marginal cost curve. Panel B shows a firm that has already
entered the market, incurring positive sunk costs; this firm will produce as long as price
exceeds the minimum of the average variable cost curve.
marginal cost, so the firm’s supply curve coincides with the marginal cost curve.
For a firm that has incurred sunk costs in entering the market (panel B), the supply
curve coincides with the marginal cost curve so long as price exceeds the minimum
value of average variable costs; when price is below the minimum value of average
variable costs, the firm exits, so supply is again zero.
THE MARKET SUPPLY CURVE
With this information about the cost curves of individual firms, we
can derive the overall market supply curve. Back in Chapter 3, the
market supply curve was defined as the sum of the amounts that each
firm was willing to supply at any given price. Figure 7.7 provides a
graphical description of the supply curve for a market with two firms.
More generally, if the price rises, the firms already in the market
(firms 1 and 2) will find it profitable to increase their output, and new
firms (with higher average variable cost curves) will find it profitable
to enter the market. Because higher prices induce more firms to enter
a competitive market, the market supply response to an increase in
price is greater than if the number of firms were fixed. In the same way,
as price falls, there are two market responses. The firms that still find
it profitable to produce at the lower price will produce less, and the
higher-cost firms will exit the market. In this way, the competitive
market ensures that whatever the product, it is produced at the lowest
possible price by the most efficient firms.
PRICE
FIGURE 7.7
Firm 1’s
supply
curve
Q 1 Q 2
Firm 2’s
supply
curve
Q 1 + Q 2
QUANTITY (Q )
THE MARKET SUPPLY CURVE
Market
supply
curve
The market supply curve is derived by horizontally adding
up the supply curves for each of the firms. More generally,
as price rises, each firm produces more and new firms
enter the market.
ENTRY, EXITS, AND MARKET SUPPLY ∂ 163