Supply Curve — Hyunjoo Park

Firm SC

The firm’s SC = its MC curve above min AVC.

Above min AVC: the firm produces where $P = MC$ → as $P$ rises, $q$ rises along MC → Profit Maximization
Below min AVC: $P < AVC$ → shut down, $q = 0$ → Shutdown Rule
Why the curve starts exactly at min AVC: MC crosses AVC at its minimum (MC < AVC pulls the average down, MC > AVC pulls it up).

Market SC

Horizontal sum of all firm SCs: at each price, add up the $q$ of every firm (not MC × number of firms).

SR: upward sloping (number of firms fixed).

LR industry SC: three shapes

LR price = $\min ATC$ (Short-run and Long-run Equilibrium), so the shape depends on how industry expansion changes every firm’s $\min ATC$ .

LR industry SC	Industry type	Why
Horizontal	Constant-cost	Expansion does not change input prices → $\min ATC$ stays the same
Upward	Increasing-cost	Expansion raises prices of specialized inputs → $\min ATC$ rises
Downward	Decreasing-cost	Expansion creates external economies → $\min ATC$ falls

External vs internal economies

External = the industry’s growth lowers every firm’s cost, outside any single firm’s control. e.g. solar PV: as the industry grows, component suppliers scale up, skilled installers and industry learning increase → every PV firm’s cost falls. Internal = a firm’s own technology or scale lowers only its own cost.

Links: Perfect Competition, Shutdown Rule, Short-run and Long-run Equilibrium, Merit Order