BE/U4 Topic 5 Industry Short Run and Long Run Supply Curves
Supply curve indicates the relationship between price and quantity supplied. In other words, supply curve shows the quantities that a seller is willing to sell at different prices.
According to Dorfman, “Supply curve is that curve which indicates various quantities supplied by the firm at different prices”. The concept of supply curve applies only under the conditions of perfect competition.
Supply curve can be divided into two parts as:
- Short Run Supply Curve
- Long Run Supply Curve
- Short Run Supply Curve of an Industry
An industry is a blend of firms producing homogeneous goods. That way, supply curve of an industry is a lateral summation of all firms.
Here, we have assumed that different firms in the industry are producing identical products.
Each firm at OP price is producing OM output. It is because all firms have identical costs. At OP price, supply of industry is 100 x M = 100M.
Similarly at OP1 price, all the firms of industry are producing 100 xM1 =100M1 quantity of output. These quantities will be called supply or output of industry. SS is the supply curve of industry. Point E shows that at OP price firm’s supply is OM and an industry’s total supply is 100 × M = 100M.
At OP1 price, firm’s supply is OM1 and industry’s supply is 100M). We get industry’s supply curve by joining points E and E1.
Thus, under perfect competition, lateral summation of that part of short run marginal cost curves of the firms which lie above the average variable cost constitutes the supply curve of the industry. According to Stonier and Hague, “short run supply curve of a competitive industry will always slope upwards since the short run marginal cost curve of the industrial firms always slope upward.”
- Long Run Supply Curve of an Industry
In the long run, industry’s supply curve is determined by the supply curve of firms in the long run. Long run supply curve in the long run is not lateral summation of the short run supply curves. Industry’s long run supply curve depends upon the change in the optimum size of firms and change in the number of firms.
It is on account of two reasons:
(i) In the long run, firms continue to enter into and exit from the industry,
(ii) Firms get economies and diseconomies of scale. This displaces the long run marginal cost (LMC).
Due to these reasons, long run supply curve of industry is not the lateral summation of supply curve of firms. In reality, long run supply curve of industry can be known from the long run optimum production of firms multiplied by the number of firms in an industry.
LRSi, = Q x N
Where LRS1 is long run supply curve of industry. Q is the optimum output of a firm and N, the number of firms.