Long Run Supply Curve of a Firm

Let us derive the enterprises long run supply curve. In the short run case, we divide the derivation into 2 parts. We first decide the enterprises profit maximising output degree when the market cost price is greater than or equivalent to the minimum (long run) AC. We decide the enterprises profit maximising output degree when the market cost price is less than the minimum (long run) AC.

Case 1: Price greater than or equal to the minimum LRAC

Assume the market cost price is p1, which surpasses the minimum LRAC. Upon equating p1 with LRMC on the increasing part of the LRMC curve, we procure output degree q1. Note also that the LRAC at q1 does not surpass the market cost price, p1. Hence, all 3 conditions foregrounded in section 3 are satisfied at q1. Thus, when the market cost price is p1, the enterprises supplies in the long run become an output equal to q1.

Long Run Supply Curve of a Firm

Case 2: Price less than the minimum LRAC

Assume the market cost price is p2, which is less than the minimum LRAC. If a profit maximising enterprise manufactures a positive output in the long run, the market cost price, p2, must be greater than or equal to the LRAC at that output degree. In other words, it cannot be the case that the enterprise supplies a positive output. So, when the market cost price is p2, the enterprise manufactures 0 output. Combining cases 1 and 2, we come to an important conclusion. An enterprises long run supply curve is the increasing part of the LRMC curve from and above the minimum LRAC together with zero output for all cost prices less than the minimum LRAC.

Long Run Supply Curve of a Firm

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