﻿ Supply Curve Of A Firm | The Theory of the Firm Under Perfection Competition - Zigya

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# The Theory Of The Firm Under Perfect Competition

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## Supply Curve Of A Firm

The supply curve of a firm shows the levels of output that the firm chooses to produce corresponding to different values of the market price. It can further be classified into short-run and long-run supply curves.

## Long Run Supply Curve Of A Firm

Case I,
Price greater than or equal to minimum LRAC.

The figure shows the output levels chosen by a profit-maximising firm in the long run for two values of the market price: p1 and p2. When the market price is p1, the output level of the firm is q1; when the market price is p2, the firm produces zero output.

Case II,
Price less than the minimum LRAC.

The long run supply curve of a firm, which is based on its long run marginal cost curve (LRMC) and long run average cost curve (LRAC), is represented by the bold line.

## Short Run Supply Curve Of A Firm

Case 1Price is greater than or equal to the minimum AVC.

The figure shows the output levels chosen by a profit-maximising firm in the short run for two values of the market price: p1 and p2. When the market price is p1, the output level of the firm is q1; when the market price is p2, the firm produces zero output.

Case 2: Price is less than the minimum AVC:

In the figure, the rising part of the SMC curve from and above the minimum AVC is represented by the bold line is the short run supply curve of a firm.

## The Normal Profit And Break-Even Point

Normal Profit: The profit level that is just enough to cover the explicit costs and opportunity costs of the firm is called the normal profit.
Break Even Point: The point on the supply curve at which a firm earns normal profit is called the break-even point of the firm. The point of minimum average cost at which the supply curve cuts the LRAC curve (in short run, SAC curve) is therefore the break-even point of a firm.

## The Shut Down Point

A business needs to make at least normal profit, in the long run, to justify remaining in an industry but in the short run, a firm will produce as long as the price per unit > or equal to average variable cost (AR = AVC). This is called the shutdown price in a competitive market.