8.11 : Long-run Supply Curve in Perfect Competition

In a perfectly competitive market, the long-run supply curve is usually perfectly elastic, represented as a horizontal line at the minimum average total cost of production.

Consider an example of bakers operating in a perfectly competitive market.

Each baker will try to maximize profits and produce at the point where marginal cost equals the market price.

In the long run, firms have the flexibility to adjust their scale of production because all inputs and costs can be varied over a more extended period. This ensures all bakers operate at the minimum point of their average total cost curve.

Now, since all bakers have identical production functions and all face identical input resource prices, they all share the same minimum ATC. This means, in the long run, the supply curve for the entire market becomes a horizontal line or a perfectly elastic curve. This is because bakers will be willing to supply any quantity of the good at the prevailing market price that covers their production costs.

However, this holds only in a constant-cost industry, where the input prices remain unchanged even as firms enter or exit the market.