(i)Short run supply curve: In a perfect competitive market, the short run supply curve is that part of its Marginal cost curve where the Marginal Cost curve is rising from the Average Variable Cost curve. As the firm is a price taker, the supply curve has the same shape as that of Marginal cost curve above AVC (Average Variable Cost).
This can be represented in the following diagram:
in the above diagram, quantity supplied is measured along ‘X’ axis and price is measured along ‘Y’ axis. The firm is in equilibrium at point E, where MR = MC. At point E1, the price P1 is equal to the AVC. This is also called as shut down point. If a firm produces beyond this point, the price will be less than the Average Variable Cost and it may incur losses. The three conditions in short run equilibrium may be expressed as P = SMC ( Short run Marginal Cost), SMC is decreasing and P e” SAVC ( Short run Average Variable Cost)
When the price increases from P1 to P2, the quantity supplied increases from Q1 to Q2 and the price line i.e., Average Revenue curve and SMC curve intersect at point E2. At this point, the P2 is equilibrium price which is also the Average Revenue and Q2 quantity of supply. Thus, it is evident from the diagram that when price rises the quantity supplied also rises and vice versa.
The relationship between price and quantity supplied in short run can be shown in the following diagram:
In the above diagram, quantity supplied is measured along ‘X’ axis and price is measured along ‘Y’ axis. When the price is increased from P1 to P2, the quantity also increased from Q1 to Q2. Similarly, when the Price falls from P3 to P2, the quantity supplied also falls from Q3 to Q2. Thus, there is a direct relationship between price and quantity supplied.
(ii) Long run supply curve of a firm :Under Perfect competition, the long run supply curve is that part of the long run Marginal Cost curve which rises from the minimum point of the long run Average Cost curve. The long run Supply curve can be shown in the following diagram.
In the above diagram, the quantity supplied is measured along ‘X’ axis and price is measured along ‘Y’ axis. The firm is in equilibrium at point E1 as the price is equal to long run Marginal Cost. The firm produces output of OQ1. If the price rises to P2, the long Run Marginal Cost intersects at point E2 which the firm to increase its supply from Q1 to Q2. Thus, when the price rises, quantity supplied gets expanded.
Similarly, when the price falls from OP1 to OP0, the firm stops production as it is below its equilibrium or shut down point.
So, the long run supply curve of a firm can be stated as that part of the curve which begins at the minimum point of LRAC and rises above the Long Run Marginal Cost curve. The long run Supply curve is from the point E1 towards E2 and so on.
