Question

The graph below shows the marginal cost (MC), average variable cost (AVC), and average total cost (ATC) curves for a firm in a competitive market. These curves imply a short-run supply curve that has two distinct parts. One part, not shown, lies along the vertical axis (quantity = 0); this represents a condition of production shutdown. Where is the other part? Use the straight-line tool to draw it.

Answer 1

ATC AVC

the Now, consider following toet . It Bosono. P-Ave. ATC • Ave. 3 at g o dit, P = Ave, Total Toron Revenue TR² Po klo 0 Cost: TC = OM Ngo voriable cost: Trc = BP. EQ. O To for Totor fired cost: TC-Tree POMNE Hence it, p-Ave, To for the - It, P = Ave, Tofore Revenue = Total Vorriable cost. i.c. from is only able to cover the vorable cost through production. Hence, the amount of loss given by Toron fired cost. Now it the firm Stop producing at short at short it will stile ineur a loss of amount by Totore fired cost. This paAve is a situation whose firms are indifferunt between producing and shut down. Now, sh P. L Are, fren firm will not even able to totor voruable cost. Hove the loss amount rs. - port of it's ebrer Fired cost & The uncorored varioble cost Total Torore Loss - shut down to minimize loss amount. only ineur a loss of Hence here the firm should it the do shut down it will gin by Toron fixed cost. That's why, there is no supply cwire tokes the above supply below p= Ave, so the the form.

Answer 2

Short run supply function of a typical firm in competitive market comprises of a vertical part (where Q = 0 till price is equal to the minimum of AVC is achieved) and an upward sloping part of the MC curve that starts from the minimum of AVC. Here the other part is shown below in black.

ATC AVC