ECO1104 Dec. 3 , 2013
YUJIE YI #7038840
The firm’s S curve in perfectly competitive markets is that portion of its MC curve that
lies above the AVC curve
A Firm’s Supply Curve (like figure 14.3)
S refers to the shutdown price (the lowest point on the AVC curve).
The shutdown price = The firm’s reservation price ($17). The firm could go either
way: enter or exit the market
Shortrun Market Supply Curve
Short run market curve shows how quantity supplied by the industry varies as market
The number of firms in industry remains the same
The production costs are held constant
The market S curve is the horizontal summation of the individual firm S curves
Same volume of the vertical axis, and the multiplied volume on the horizontal axis.
Since all firms are identical, think of the market S cure as the individual firm S curve
multiplied by the number of firms
Figure 146: Market Supply with a Fixed Number of Firms
1 /6 The market supply curve shape is the same with the individual firm supply curve.
The only difference between those two supply curves is the scale of the horizontal
From the Short Run to the Long Run
If economic profits are being made, the firm has a supernormal rate (a positive
economic profit) of return.
The firm is profitable, and it is earning economic profits.
Given the assumptions of free entry, which we have not yet used, firms will enter.
It is relatively easy for new firms to enter the competitive market.
Four Things Happen
Firms enter, market S increases (all firms are squeezed)
Market P decreases, so firm price decreases
This process stops when profits = 0 (economic profit = 0) , as there is no further
incentive to enter.
Recall that rofits = Q * [P – ATC] = 0, so price is driven down to ATC (P =
The price driven down to ATC means the breaking even per unit
S stops shifting, no more changes in market/ firm price. ECO1104 Dec. 3 , 2013
YUJIE YI #7038840
Entry into a Profitable Market
When more firms inter markets, the market supply expands.
For the entire market, the quantity demanded move down along with the market
As new firms enter an industry, the price falls and the economic profit of each
existing firm decreases .
In essence, the supernormal profits are competed away by entry into the industry. Profits
thus serve a usef