Question

What is the supply curve of a firm in the long run?

Answer 1

In the long run, as there is no fixed cost, the perfectly competitive firm’s supply curve will be the summation of the upward sloping portion of SMC above the minimum point of LAC (when price ≥ minimum LAC), and the vertical portion of the price axis (when price < minimum of LAC). The long run supply curve of a perfect competitive firm is derived in two stages.

1. When price is equal to the minimum of LAC:

Let us suppose that the firm is facing market price OP that exceeds the minimum of LAC. MC is equal to MR (at point E) and MC is positively sloped at this point of intersection. Also, the price is greater than the minimum of LAC. Thus, the firm is at long run equilibrium, facing the price OP and producing Oq₁ units of output. The supply curve is ‘SS’, represented by the upward portion of LMC above the minimum of LAC.

2. When the price is less than the minimum of LAC:

Let us suppose that the market price faced by a firm is OP₁, which is less than the minimum of LAC. At this price, the firm would not produce any output because producing any output will lead the firm to incur losses. Therefore, the firm would not produce anything. So, the supply curve of the firm in the long run for the price less than the minimum of LAC is given by S₁S₁ and is represented by the darkened vertical part of the price axis.

Combining 1^st and 2^nd stages, the firm’s long run supply curve under perfect competition is given by (S₁S₁ + SS).