Let us derive an enterprise’s short run supply curve. We shall divide this derivation into two parts. And, first, determine an enterprise’s profit-maximising output degree when the market cost price is greater than or equal to the minimum AVC. Now, we can determine the enterprise’s profit-maximising output degree when the market cost is less than the minimum AVC.
Case 1: Price is greater than or equal to the minimum AVC
Assume the market cost price is p1, which surpasses the minimum AVC. We begin by equalising p1 with SMC on the increasing part of the SMC curve; this leads to the output degree q1. Note also that the AVC at q1 does not surpass the market cost price,p1. Hence, all three conditions foregrounded in section 3 are satisfied at q1. Therefore, when the market cost price is p1, the enterprise’s output degree in the short run is equal to q1.
Case 2: Price is less than the minimum AVC
Assume the market cost price is p2, which is less than the minimum AVC. If a profit-maximising enterprise manufactures a positive output in the short run, then the market cost price, p2, must be greater than or equal to the AVC at that output degree. In the image, AVC strictly surpasses p2. In other words, it can’t be the case that the enterprise supplies a positive output. So, if the market price is p2, the enterprise manufactures zero output.
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