8.7 : Short-run Supply Curve in Perfect Competition

In perfect competition, a firm's supply curve aligns with the segment of the marginal cost curve, surpassing the minimum average variable cost.

At prices below the minimum AVC, which is the shut-down point, a rational firm's output becomes zero to prevent further losses. This segment of the y-axis represents it.

This implies that the firm only produces goods when the revenue per unit sold, which is the market price, is at least as high as the variable cost per unit produced, which is the average variable cost.

In addition to the price of a product, the price of inputs used in production can also strongly influence a firm's supply curve.

For instance, consider a bakery operating in a perfectly competitive market and making 1,000 loaves of bread. The bakery faces a marginal cost curve of MC and the market price for a loaf of bread is $2.

If there's a rise in the price of wheat flour, a key ingredient, it will increase the production cost. As a result, the MC curve will shift upwards, reducing the profit-maximizing quantity.

Similarly, a decrease in input prices can shift the MC curve downward, increasing the profit-maximizing quantity.