Insight Into SupplyThe analysis of the short-run production decisions for a perfectly competitive firm has direct implications for the market supply curve and the law of supply. This offers a prime explanation for the law of supply. And because all firm's in a perfectly competitive industry have positively-sloped marginal cost curves, the market supply curve for the entire industry is also positively sloped. The marginal cost curve is thus the perfectly competitive firm's supply curve.īecause the marginal cost curve is positively sloped due to the law of diminishing marginal returns, so too is the firm's supply curve. In other words, the firm produces by moving up and down along its marginal cost curve. In that price equals marginal revenue for a perfectly competitive firm, price is also equal to marginal cost. A perfectly competitive firm maximizes profit by producing the quantity of output that equates marginal revenue and marginal cost. As such, the firm moves along its positively-sloped marginal cost curve in response to changing prices. A perfectly competitive firm maximizes profit by producing the quantity of output that equates price and marginal cost. PERFECT COMPETITION, SHORT-RUN SUPPLY CURVE: A perfectly competitive firm's supply curve is that portion of its marginal cost curve that lies above the minimum of the average variable cost curve. The other half of the scarcity problem is unlimited wants and needs. This is one half of the fundamental problem of scarcity that has plagued humanity since the beginning of time. LIMITED RESOURCES: Finite quantities of labor, capital, land, and entrepreneurship available to an economy for the production of goods and services. AmosWEB means Economics with a Touch of Whimsy!
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