The short run is such a period in which the invariable factors such as plants, machinery, etc. cannot be varied. The firm can hence hike the productivity by amplifying the quantities of variable factors like labour, raw materials etc. Thus the short run supply curve of he firm is that portion of its marginal cost curve which lies above its average variable costs.
Long Run Supply Curve of the Firm and Industry
The long run supply curve of a perfectly competitive industry shoes the diverse volume of a product proffered at diverse prices. In the long run, the firms can change the existing plant and equipment and they can enter or leave the industry, so that price is always equal to both the marginal cost as well as the minimum average cost.
Nevertheless the entry or exit of firms afflicts the cost of productive resources and thereby causes shifts in cost curves of the individual curves of the individual firms. Thus the long run supply curves can be upward inclining, horizontal or downward inclined based on the law of returns under which the industry is functioning.
Increasing Cost Industry
An industry is an increasing cost industry whose long run supply curve inclines upward from left to right when factor prices hikes as industry output expands. Let us assume that the industry is functioning under the law of diminishing returns. The enlargement of the industry by the entry of new firms causes the demand for factors to hike thus amplifying their price which in turn shifts the cost curves of the firms upward.
It means that the minimum point on the average cost curve will be at a higher level than before. The upward shifting of the cost curves is due to the presence of external diseconomies like hike in the prices of raw materials, plant and equipment, wages of labour etc. This makes the long run supply curve of the industry incline upward to the right.
An industry is said to be a constant cost industry if its long run supply curve is horizontal when factor prices stays invariable as industry productivity expands. A constant cot industry is subject to both external economies and diseconomies in such a way that they counter balance each other so that there are constant costs in the long run.
In other words, in such a condition, the supply of diverse factors is perfectly elastic. When new firms enter he industry in the long run, they are able to acquire them at same prices. Thus there is no change or shifting of the cost curves. Under these conditions, the minimum point on the LAC curve remains unchanged.
Decreasing Cost Industry
In the case of a decreasing cost industry, the long run supply curve is downward inclined for the reason that factor prices fall as industry productivity enlarges.
Supply Curve Under Monopoly or Imperfect Competition
There is no exclusive
supply curve imperfect competition or monopoly. The rationale is that price is concurrently
indomitable along with output. Disparate perfect competition the price is not given
to the manufacturer under monopoly. He is price maker who can set the price to his
maximum benefit and his productivity or supply is ascertained by the consumer demand
for his produce. It is hence impracticable to talk of a supply curve under monopoly.
This can be proved with the below presented sketches.
Sketch 1 demonstrates two demand curves AR1 and AR2 faced by the manufacturer under monopoly. Specified his MC curve, the optimum output OQ is indomitable when MC = MR1 at point E1. The price is OP1 (= Q1A). When the demand is AR2, the optimum output OQ2 is indomitable by the equality of MC and MR2 at point E2. The price is the same OP1 = (=Q2B = Q1A). This denotes that the productivity supplied by the producer under monopoly depends upon the demand circumstances for this produce and no exclusive supply curve can be drawn for him.
Sketch 2 demonstrates the case where a given productivity is linked with two diverse prices. When the demand curve is AR1, OQ productivity is resolute at OP (=QA) price with equilibrium at Point E where MC = MR1. When the demand curve is AR2, the same productivity OQ is ascertained at point E where MC = MR2 but it is sold at a higher price OP1 (=QB). This is the case when the demand fluctuates per period and the same quantity is sold by the manufacturer at diverse prices.
In period 1, the demand curve AR1 is elastic and the monopolist sells OQ quantity at OP price. In period 2, the demand curve AR2 is less elastic and he sells the same quantity OQ at a higher price OP1. These two cases show that there is no exclusive supply curve under monopoly.
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- Applications of Demand and Supply Analysis under Perfect Competition
- Concepts of Revenue
- Derived Demand, Joint Supply
- Determination of Profit Maximisation under monopolist situation
- Duopoly and Oligopoly
- Equilibrium of the Firm and Industry
- Forms of Market Structure
- Importance of Time Element in Price Theory
- Joint Demand Supply
- Linear Programming
- Long Run Equilibrium of Firm and Industry
- Market Structures
- Monopolistic Competition
- Monopsony and Bilateral Monopoly, Price output Determination
- Objectives of Business Firm
- Oligopoly, Cournot's Oligopoly Model
- Pricing of Public Undertakings
- Profit Maximisation, Full cost, Pricing and Sales Maximisation
- Pricing Under Perfect Competition - Demand Supply - Basic Framework
- Profit Price Policy
- Resource allocation under monopoly
- Similarities and Dissimilarities between Monopoly Competition and Perfect Competition
- Supply Its Law - Elasticity and Curve
- The Nature of Costs and Cost Curves
- Williamson's Utility Maximisation