Economics · Ch 10 — The Theory of the Firm under Perfect Competition

Market Supply Curve

10.6

Market Supply Curve

4.6 Market Supply Curve

The market supply curve tells us the total quantity that all firms in a market are willing to produce at each possible market price. On a standard graph, the market price is on the vertical axis (y-axis) and the aggregate output level is on the horizontal axis (x-axis). The curve itself shows how the combined output of all firms responds as price changes.

Deriving the Market Supply Curve

Consider a market with $n$ firms — firm 1, firm 2, firm 3, and so on. When the market price is fixed at some value $p$ , each firm decides how much to produce based on its own cost structure. The total output supplied by all firms together is simply the sum of what each individual firm supplies at that price:

\text{Market supply at price } p = S_1(p) + S_2(p) + S_3(p) + \dots + S_n(p)

where $S_i(p)$ is the supply of firm $i$ at price $p$ .

This is the core idea: market supply is the horizontal summation of individual firm supply curves. We add quantities, not prices — for a given price, we add up the quantities each firm produces.

Geometric Construction with Two Firms

To see how this works visually, take a market with just two firms: firm 1 and firm 2. They have different cost structures, so their supply behaviour differs.

Let $p_1$ be the minimum price at which firm 1 is willing to produce anything — below $p_1$ , firm 1 supplies zero. Let $p_2$ be the corresponding threshold for firm 2. Assume $p_2 > p_1$ — firm 2 needs a higher price to start producing.

Note

Why different thresholds? Each firm has its own cost structure. Firm 1 might have lower average costs, so it can profitably produce at a lower price. Firm 2, with higher costs, needs a higher price to cover its expenses.

Now examine the three price ranges:

Price below $p_1$ . Both firms produce nothing. Market supply is zero.

Price between $p_1$ and $p_2$ . Firm 1 produces a positive amount; firm 2 still produces nothing. So the market supply curve in this range is exactly the same as firm 1's supply curve.

Price at or above $p_2$ . Both firms produce positive amounts. The market supply is the sum of their individual supplies.

Take a concrete price $p_3$ that is greater than $p_2$ . At this price, firm 1 supplies $q_3$ units and firm 2 supplies $q_4$ units. The market supply at $p_3$ is:

q_5 = q_3 + q_4

What the Three Panels of Figure 4.13 Show

Panel (a) shows the supply curve of firm 1, labelled $S_1$ . It begins at price $p_1$ on the vertical axis and slopes upward.

Panel (b) shows the supply curve of firm 2, labelled $S_2$ . It begins at the higher price $p_2$ and also slopes upward.

Panel (c) shows the market supply curve, labelled $S_m$ . For prices below $p_1$ , it lies on the horizontal axis (zero output). Between $p_1$ and $p_2$ , it follows $S_1$ exactly. At and above $p_2$ , it lies to the right of both individual curves — at each price, the horizontal distance from the vertical axis to $S_m$ equals the sum of the distances to $S_1$ and $S_2$ .

This is why we say the market supply curve is obtained by horizontal summation of the individual supply curves.

Figure 4.13The Market Supply Curve. Panel (a) shows the supply curve of firm 1. Panel (b) shows the supply curve of firm 2. Panel (c) shows the market supply curve, which is obtained by taking a horizontal summation of the supply curves of the two firms.

Fig. 4.13 — The Market Supply Curve. Panel (a) shows the supply curve of firm 1. Panel (b) shows the supply curve of firm 2. Panel (c) shows the market supply curve, which is obtained by taking a horizontal summation of the supply curves of the two firms.

Drawn by us to help you understand the concept clearly, and verified to make sure it's accurate. For exams, practice from your textbook's own diagram.

The figure is built around three panels arranged side by side. Each panel has price on the vertical axis and quantity on the horizontal axis. Panel (a) shows the supply curve of firm 1, panel (b) shows the supply curve of firm 2, and panel (c) shows the market supply curve. The key idea is that the market supply curve is not drawn from thin air — it is the horizontal sum of the individual firms’ supply curves.

In each firm’s panel, the supply curve is the portion of its marginal cost curve that lies above the minimum of its average variable cost. For a perfectly competitive firm, this is the rule: produce where price equals marginal cost, but only if price covers average variable cost; otherwise shut down. So the firm’s supply curve is upward-sloping from that minimum point onward. In the figure, firm 1’s supply curve starts at a certain minimum price, and firm 2’s starts at a possibly different minimum price (because firms can have different cost structures).

The horizontal summation works like this: at any given price, you read off the quantity supplied by firm 1 from panel (a) and the quantity supplied by firm 2 from panel (b). Then you add those two quantities together to get the total quantity supplied in the market at that price. That sum is plotted in panel (c). For example, if at price ₹10 firm 1 supplies 5 units and firm 2 supplies 3 units, the market supplies 8 units at ₹10. You repeat this for every price, and the resulting curve in panel (c) is the market supply curve.

Note

Horizontal summation means adding quantities, not prices. At a given price, you add the horizontal distances from the vertical axis to each firm’s supply curve. This is why it’s called horizontal — you move horizontally from the price axis to each curve, sum those distances, and plot the total.

The textbook uses this figure to develop the formula for market supply. If $S_1(p)$ is the supply function of firm 1 (quantity supplied as a function of price) and $S_2(p)$ is the supply function of firm 2, then the market supply function $S(p)$ is:

S(p) = S_1(p) + S_2(p)

Here, $p$ is the market price (same for all firms in perfect competition), $S_1(p)$ is the quantity firm 1 supplies at price $p$ , $S_2(p)$ is the quantity firm 2 supplies at price $p$ , and $S(p)$ is the total quantity supplied in the market at that price. This generalises to $n$ firms: $S(p) = \sum_{i=1}^{n} S_i(p)$ . …

Watch out

Horizontal vs vertical summation. In supply, we add quantities at a given price — that is horizontal summation (add along the x-axis). Do not confuse this with vertical summation, where you would add prices at a given quantity (used in some other contexts like adding demand curves for public goods).

Shifts in the Market Supply Curve

The derivation above assumes a fixed number of firms. If the number of firms changes, the entire market supply curve shifts:

Increase in the number of firms — the market supply curve shifts to the right. At every price, more output is available.
Decrease in the number of firms — the market supply curve shifts to the left. At every price, less output is available.

This makes intuitive sense: if more producers enter the market, total supply rises; if firms exit, total supply falls.

Numerical Example

The textbook works through a concrete numerical example with two firms. Let the supply curve of firm 1 be:

S_1(p) = \begin{cases} 0 & \text{if } p < 10 \\ p - 10 & \text{if } p \geq 10 \end{cases}

This means: if the market price is below ₹10, firm 1 produces nothing. If the price is ₹10 or above, firm 1 produces $(p - 10)$ units.

Let the supply curve of firm 2 be:

S_2(p) = \begin{cases} 0 & \text{if } p < 15 \\ p - 15 & \text{if } p \geq 15 \end{cases}

Firm 2 needs a price of at least ₹15 to start producing; above that, it supplies $(p - 15)$ units.

The market supply curve is the sum:

S_m(p) = S_1(p) + S_2(p)

Working this out piece by piece:

When $p < 10$ : Both firms supply zero. So $S_m(p) = 0$ .
When $10 \leq p < 15$ : Firm 1 supplies $(p - 10)$ , firm 2 supplies zero. So $S_m(p) = p - 10$ . …

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