Question

6. Deriving the short-run supply curve

Consider the competitive market for halogen lamps. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry.

Answer 1

Consider the Table given below: QuantityProduce/s Profit or (dollar per ( 10 20 32 40 50 60 Lamps) hut down loss Shut dowLoss 0 or 30,000 IndifferentLoss Loss 37,000 Produce Loss 35,000 Produce L 40,000 Produce Breakeven 42,000 Produce Profits The firm will produce 0 quantity when price is less than AVC and it will shut down its firm. The firm will be indifferent between producing or shutting down its production when price is equal to AVC. The firm will produce when price is more AVC but less than ATC. It will incur losses. The firm will produce when price is equal to ATC and earns a zero economic profits. The firm will produce and earn positive profits when the price is more than ATC. This can be shown in Table given above

Under perfect-competition, the short-run supply curve is the marginal cost curve above the average variable cost curve. The supply curve is drawn below: 100 T 90 Supply Curve 70 60 0 50 40 30 20 10 0 10 15 20 25 30 35 40 45 50 QUANTITY (Thousands of lamps)

It is given that there are 10 firms in the industry. There will be horizontal summation of individual supply curves to obtain industry supply curve. 100 90 80 Demand 70 60 50 40 30 20 10 Supply 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Thousands of lamps) The equilibrium is attained at price equals S40 and quantity is 37,000 At the current short-run market price, firms will produce in the short-run. In the long-run, some firms will exit the industry because the firms are making losses.