Question

Under perfect competition, the short-run supply curve of an individual profit-maximizing firm corresponds to which of the following segments?

• A. The rising portion of the Short-run Marginal Cost (SMC) curve at and above the minimum point of the Average Variable Cost (AVC) curve.
• B. The entire upward-sloping region of the Short-run Average Cost (SAC) curve.
• C. The downward-sloping portion of the Short-run Marginal Cost (SMC) curve.
• D. The rising portion of the SMC curve above the minimum point of the Average Fixed Cost (AFC) curve.

Hint:

The portion of the MC curve above the minimum AVC point represents the short-run supply curve of a perfectly competitive firm.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
In perfect competition, a firm is a price taker. To maximize profit, it produces where \(Price = Marginal Cost\).
However, in the short run, the firm must decide whether it is even worth staying open.
If the price falls below its variable costs, the firm loses more money by producing than by simply shutting down.
Step 2: Detailed Explanation:
The short-run supply curve is derived based on two main conditions:
1. The Profit Maximization Condition:
The firm will produce at a point where \(P = SMC\), provided that \(SMC\) is rising. If \(SMC\) were falling, the firm could increase profit by producing more. Therefore, only the rising portion of the \(SMC\) curve is relevant.
2. The Shutdown Condition:
In the short run, a firm has fixed costs (like rent) that it must pay regardless of output. It only continues production if the price (\(P\)) is at least equal to or greater than the Average Variable Cost (\(AVC\)).
If \(P<\text{minimum } AVC\), the firm cannot even cover its day-to-day operational expenses (wages, raw materials), and it will shut down to minimize losses.
The point where \(P = \text{minimum } AVC\) is called the Shutdown Point.
Conclusion:
The firm starts supplying goods only once the price reaches the minimum point of the \(AVC\) curve. Above this price, it follows the \(SMC\) curve.
Step 3: Final Answer:
The short-run supply curve of a perfectly competitive firm is the rising part of the \(SMC\) curve starting from the minimum point of the \(AVC\) curve.
Thus, Option (A) is correct.