Short-Run Supply | Econ Academy

The competitive firm’s short-run supply curve is its $M C$ curve above the $A V C$ curve. Why above $A V C$ ? Because if the price falls below $A V C$ , the firm should shut down entirely (we’ll cover the shutdown condition in the next KP). For any price at or above $A V C$ , the firm uses $P = M C$ to pick how much to produce.

Key Term

Short-Run Supply Curve

The individual firm’s short-run supply curve is the portion of the $M C$ curve that lies above the $A V C$ curve. At each price, the firm produces where $P = M C$ . Below $A V C$ , the firm produces $Q = 0$ .

The firm’s supply: produce where $P = M C$ when price covers variable costs; otherwise shut down

The market supply curve is the horizontal sum of all individual firms’ supply curves. At each price, add up the quantity every firm is willing to produce. Because individual $M C$ curves slope upward, the market supply curve also slopes upward. When the price rises, each existing firm produces more (moving up its $M C$ curve) and potentially new firms enter.

Worked Example

A firm has $M C = 4 + Q$ and $A V C = 4 + 0.5 Q$ . The minimum $A V C$ occurs at $Q = 0$ where $A V C = 4$ dollars. If the market price is 10 dollars, how much does the firm produce?

Interactive —

M C

A T C

, and

A V C

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MC, ATC, and AVC curves with the price line that defines the supply region.

Check yourself · no marks

Why is the firm’s supply curve only the $M C$ curve above $A V C$ , not the entire $M C$ curve?

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Practice · 1 / 4

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Test your understanding of short-run supply:

The short-run supply curve of a competitive firm is:

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