Individual Supply Curve in the Short Run and Long Run: Videos & Practice Problems

In perfect competition, a firm's short-run supply curve is determined by the portion of the marginal cost (MC) curve that lies above the minimum average variable cost (AVC). The firm will produce only if the market price (P) is greater than the AVC, as this ensures that the firm covers its variable costs and contributes to fixed costs. If the price falls below the minimum AVC, the firm will shut down in the short run, producing zero output. Therefore, the short-run supply curve is the MC curve above the minimum AVC, reflecting the quantities the firm is willing to supply at different prices above this shutdown point.

The long-run supply curve differs from the short-run supply curve primarily in the cost threshold that determines production. In the long run, a firm will produce only if the price (P) is greater than or equal to the minimum average total cost (ATC), ensuring that all costs, including fixed and variable, are covered. The long-run supply curve is the portion of the marginal cost (MC) curve above the minimum ATC. If the price falls below this point, the firm exits the market, producing zero output. This contrasts with the short run, where the firm only needs to cover average variable costs to continue producing.

A firm shuts down in the short run when the market price (P) falls below the minimum average variable cost (AVC) because it cannot cover its variable costs, leading to losses greater than fixed costs if it continues producing. However, the firm still incurs fixed costs in the short run. In the long run, the firm exits the market if the price is below the minimum average total cost (ATC), as it cannot cover total costs (fixed plus variable). Since all costs are variable in the long run, the firm chooses to leave the market to avoid sustained losses.

In the long run, a firm's profit is represented by the area between the market price (P) and the average total cost (ATC) at the quantity produced. When the price is above the minimum ATC, the firm produces where marginal cost (MC) equals marginal revenue (MR), and the vertical distance between P and ATC indicates profit per unit. The total profit is the product of this difference and the quantity produced. If the price equals ATC, the firm breaks even, earning zero economic profit. If the price falls below ATC, the firm exits the market.

The marginal cost (MC) curve plays a central role in forming the firm's supply curve because it shows the cost of producing one additional unit of output. In both the short run and long run, the firm's supply curve corresponds to the portion of the MC curve above the relevant cost threshold—average variable cost (AVC) in the short run and average total cost (ATC) in the long run. The firm supplies output where the market price equals marginal cost, maximizing profit or minimizing loss. Thus, the MC curve above these cost thresholds effectively traces the quantities the firm is willing to supply at different prices.