Firm Supply and Market Supply
At each possible market price, a competitive firm chooses output where price meets rising marginal cost, provided price covers minimum AVC. Therefore, the firm's short-run supply curve is the rising portion of MC above minimum AVC. Below the shutdown price, quantity supplied is zero.
This result is a behavioral rule, not merely a curve label. A higher price raises MR for every unit, so the firm moves upward along MC to a larger profit-maximizing output.
Add firms horizontally
Market supply is the sum of firm quantities at the same price:
Firms can have different technologies and shutdown thresholds. As price rises, additional firms may begin producing, causing kinks in market supply.
Market-supply step workshop
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Movements and shifts
A change in the product's own price causes movement along each firm supply curve and market supply. Input prices, technology, taxes, weather, or expectations can change marginal cost and shift firm supply. Entry and exit change the number of firms and therefore shift market supply even if each existing firm's cost curve remains unchanged.
A fixed-cost increase does not directly change a continuing firm's short-run MC or AVC, so it need not shift that firm's short-run supply. If the increase persists, it lowers profit and may cause long-run exit, shifting market supply left.
The supply curve assumes firms can sell all chosen output at market price. Capacity constraints, inventories, and adjustment delays can make real short-run responses less smooth.
Assemble four firms
At price 10, four farms choose outputs of 6, 4, 2, and 0. Market supply is 12. At price 12, their outputs may become 8, 6, 4, and 2, so market supply rises to 20. The market curve changes slope when the fourth farm crosses its shutdown threshold and begins producing.
Horizontal summation is a repeated procedure, not a one-time formula: fix price, find every firm's profit-maximizing output, and add those quantities. Never add the prices faced by different firms.
Trace shocks through two layers
An input-price increase raises firm MC, so each firm supplies less at every product price; market supply shifts left. A higher fixed license fee does not immediately alter MC or AVC for continuing firms, but persistent losses can cause exit. Market supply then shifts left because fewer firm curves are being added.
This two-layer view—output per firm and number of firms—prepares the long-run entry and exit analysis.
KNOWLEDGE QUIZ
Aggregate four farms' supply
Four price-taking farms have supply rules q1=max(0,P−4), q2=max(0,P−6), q3=max(0,P−8), and q4=max(0,P−10). Use prices 4,6,8,10,12.
- Construct every firm's and the market supply table.
- Derive piecewise market supply as firms enter production.
- Graph individual curves lightly and market supply prominently.
- Explain why a fixed cost increase does not immediately shift a continuing firm's short-run supply curve.