Determinants of a Firm’s Supply Curve

In the previous concept, we had learnt that an enterprise’s supply curve is the part-and-parcel of its marginal cost curve. Hence, any factor that affects an enterprise’s marginal cost curve is, of course, a determinant of its supply curve. In this concept, there exist two such determinant factors.

Technological Progress

Assume that an enterprise uses two factors of production—labour and capital—to manufacture a certain commodity. Subsequent to an organisational innovation by the enterprise, the same degrees of labour and capital now manufacture more units of output. To put it in a different way, to manufacture a given degree of output, the organisational innovation allows the enterprise to use fewer units of inputs.

It is expected that this will lower the enterprise’s marginal cost at any degree of output, i.e., there is a rightward (or downward) shift of the MC curve. As the firm’s supply curve is essentially a segment of the MC curve, technological progress shifts the supply curve of the firm to the right. At any given market price, the firm now supplies more units of output.

Input Prices

A change in the input prices also affects a firm’s supply curve. If the price of an input (say, the wage rate of labour) increases, the cost of production rises. The consequent increase in the firm’s average cost at any level of output is usually accompanied by an increase in the firm’s marginal cost at any level of output, which means that there is a leftward (or upward) shift of the MC curve.

This refers to the fact that the firm’s supply curve shifts to the left. At any given market price, the firm now supplies fewer units of output.

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