Q.How price is determined when fixed number of firms exist in perfect competition?
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The Short Run Supply Curve: From a Lemonade Stand to Market Logic
Imagine you run a small lemonade stall. One hot afternoon, a customer offers you ₹50 for a glass — your usual price is ₹20. Do you sell it? Of course you do. But what if the price drops to ₹5? You'd probably refuse, because the cost of lemons, sugar, and your time is more than that.
This instinct — sell more when price is high, sell less (or nothing) when price is low — is the seed of the supply curve. But in economics, we need to be precise about when this logic applies.
The Precise Meaning
The Short Run Supply Curve of a firm shows the quantity of output a profit-maximising firm is willing to supply at each possible market price, when at least one factor of production is fixed (typically capital — factory size, machinery). In the short run, the firm cannot change its plant size; it can only vary variable inputs like labour and raw materials.
The short run supply curve of a perfectly competitive firm is that portion of its Marginal Cost (MC) curve which lies above the Average Variable Cost (AVC) curve.
Why this specific part? Because the firm's decision rule is simple: produce as long as the price covers the variable cost of production. Fixed costs (rent, loan payments) are already sunk — they exist whether the firm produces or not.
The Logic Behind the Shape
The supply curve slopes upward in the short run. Here's why:
- Diminishing returns: As you hire more workers on a fixed factory floor, each additional worker adds less to output than the previous one. So to produce one more unit, you need more and more labour — raising the marginal cost.
- Profit-maximisation rule: A firm produces where P=MC (price equals marginal cost). As price rises, the firm moves up its MC curve, producing more.
- Shutdown point: If price falls below the minimum of AVC, the firm cannot even cover its variable costs. It's better to shut down (produce zero) and only lose fixed costs. So the supply curve starts only from the point where P≥min AVC.
A common mistake: thinking the supply curve is the entire MC curve. It is not. The portion below the AVC curve is irrelevant — the firm would never produce there.
Diagram in Words
Draw the standard cost curves:
- MC curve: U-shaped, rising steeply after a point.
- AVC curve: U-shaped, lying below the Average Total Cost (ATC) curve.
- The short run supply curve is the rising portion of MC from the point where it cuts the AVC curve (the minimum point of AVC) and continues upward.
At any price below this intersection, supply is zero. At any price above it, the firm supplies the quantity where P=MC.
Why It Matters
The short run supply curve is not just a textbook abstraction. It explains real-world behaviour:
- Why farmers sometimes destroy crops: If market price falls below variable cost, it's rational to not harvest — even if fixed costs (land, equipment) are already paid. …
With a fixed number of firms in the short run, the market supply is built by adding up all the firms' individual supplies, and price then adjusts to clear the market.
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With a fixed number of firms, price is set where market demand = market supply (sum of firms' supplies).
In perfect competition with a fixed number of firms (the short run), each firm supplies according to its own marginal cost curve above minimum average variable cost. The market supply curve is the horizontal summation of all these individual firm supply curves. The equilibrium price is determined at the level where the total quantity supplied by all firms equals the total quantity demanded by all buyers. At that price the market clears — there is no excess deman …
- CBSE 2026Set MARCH1 markQ.What is Supply?
›Reveal solutionSolution
Supply is the quantity of a good a firm is willing and able to sell at a given price in a given period.
Supply is not the same as the total stock a seller holds; it is only that part which the seller is willing and able to offer for sale at a particular price during a particular period. It is therefore a flow concept and always relates to a specific price and time. Other things remaining constant, supply usually rises as price rise …
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: By aggregate the supply curves of individual firms we got ________ curve.
›Reveal solutionSolution
The blank is filled by 'market supply' curve.
The market supply curve shows the total quantity of a good that all firms together are willing to supply at each price. It is obtained by horizontally adding (aggregating) the individual supply curves of all the firms in the market at every …
- CBSE 2025Set ANNUAL1 markMCQQ.Supply is associated with which of the following? (A) A time period (B) Price (C) Both (A) and (B) (D) None of these
›Reveal solutionSolution
Supply is always stated with respect to a price and a time period, so the answer is (C).
Supply means the quantity of a good that producers are willing and able to offer for sale at a particular price during a specified period of time. It is a flow concept, so it must be measured over a period (per day, week, etc.), and it is defined at a given price, since the quantity supplied c …
- CBSE 2025Set ANNUAL1 markMCQQ.Which of the following functions shows the Law of Supply? (A) S = f(P) (B) S = f(1/P) (C) S = f(Q) (D) None of these
›Reveal solutionSolution
The Law of Supply is written S = f(P), so the answer is (A).
The Law of Supply states that, other things being equal, the quantity supplied of a good rises as its price rises and falls as its price falls — a direct (positive) relationship. In functional form this is S = f(P), where S is quantity supplied and P is price. Option (B) S = f(1/P) would wrongly imply an …
- CBSE 2025Set ANNUAL1 markQ.Write the answer in one sentence: What is the supply curve of a firm in the short run?
›Reveal solutionSolution
Short-run supply curve = rising part of SMC above the minimum of AVC.
In the short run, a profit-maximising firm produces where price = marginal cost (on the rising part of MC). But it will produce only if the price at least covers its average variable cost; below the minimum of AVC it minimises losses by shutting down (producing zero). Therefore the firm's short-run supply curve is the portion of its short-run marginal cost (SMC) curve lying at or above the minimum point of the AVC curve. …
- CBSE 2024Set MARCH1 markMCQQ.Point on the supply curve at which firm earns only normal profit is(a) Break-even point(b) Shutdown point(c) Both(a) &(b)(d) None of the above
›Reveal solutionSolution
The point on the supply curve where the firm earns only normal (zero economic) profit is the break-even point, where P = minimum AC (Kerala Plus Two/DHSE economics).
…
- CBSE 2024Set ANNUAL1 markMCQQ.Determining factor(s) of supply of goods is/are (A) Price of goods (B) Price of related goods (C) Price of factors of production (D) All of these
›Reveal solutionSolution
Own price, prices of related goods and factor prices all determine supply, so the answer is (D).
In the BSEB Inter Class-12 Economics syllabus, the supply of a good depends on several factors:
- (A) Price of the good itself — a higher price generally raises quantity supplied (law of supply).
- (B) Prices of related goods — if producing an alternative good becomes more profitable, supply of this good may fall. …
- CBSE 2024Set ANNUAL1 markMCQQ.Which type of relationship is found between quantity supplied of a good and its price? (A) Inverse (B) Direct (C) Both (A) and (B) (D) None of these
›Reveal solutionSolution
Quantity supplied and price have a direct (positive) relationship, so the answer is (B).
In the BSEB Inter Class-12 Economics syllabus, the law of supply states that, other things being equal, a rise in price raises the quantity supplied and a fall in price lowers it. Thus price and quantity supplied move in the same direction — a direct (positive) relationship — giving …
- CBSE 2024Set ANNUAL1 markQ.Very short answer:(x) Name two determining elements of supply curve of a firm.
›Reveal solutionSolution
The firm's short-run supply curve is determined by its marginal cost curve and the minimum point of its average variable cost curve.
In perfect competition a firm produces where price equals marginal cost, so its supply decisions trace out the marginal cost curve. However, the firm supplies a positive output only if price is at least equal to the minimum of average variable cost (below that it shuts down). Hence the two determining elements of the firm's short-run supply curve are:
…
- CBSE 2023Set MARCH1 markMCQQ.The short run shut-down point of a firm in a perfect competitive market is :(a) Price = Average Cost(b) Price = Total Cost(c) Price = Total Variable Cost(d) Price = Average Variable Cost
›Reveal solutionSolution
The short-run shut-down point of a perfectly competitive firm is where Price = minimum Average Variable Cost (AVC).
Why:
- In the short run, fixed costs must be paid whether or not the firm produces, so they are irrelevant to the operate-or-shut decision.
- The firm continues producing as long as price covers AVC (so it recovers variable cost and contributes something toward fixed cost). …
- CBSE 2020Set ANNUAL1 markQ.What is meant by supply ?
›Reveal solutionSolution
Supply = the quantity of a good that producers are willing and able to sell at a particular price over a particular period of time.
Supply is the quantity of a commodity that a seller (or all sellers together) offers for sale at a given price during a given period of time. Three elements are essential to the idea of supply:
- Price — supply is always stated with reference to a price; the same seller offers different quantities at different prices.
- Time — supply refers to a specified period (per day, week, etc.), because how much can be offered depends on the time available.
- Willingness and ability to sell — mere possession of a stock is not supply; the goods must actually be offered for sale. …
- CBSE 2020Set ANNUAL1 markMCQQ.Supply is associated with -(a) A time period(b) Price(c) Both(a) and(b)(d) None of these
›Reveal solutionSolution
Supply is associated with both a time period and a price — option (c).
Supply is the quantity of a commodity that sellers are willing to offer for sale at a given price during a given period of time. It is always stated with reference to both a price (quantity supplied varies directly with price) and a time period (supply is per day, per wee …
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