It is with help of a supply curve that particular supply at a specific price can be determined. When competitive firms are concerned in the market, output increases to that point where marginal cost is equivalent to value of that product concerned, but in case price is kept below average variable cost it will close down. So when a specific company’s supply curve is concerned, marginal cost is higher than average cost, a portion of marginal cost curve is taken into consideration.
In this curve, supply in regards to short run is taken into consideration. If price is taken greater than average cost, there is profit maximizing output which helps in depicting graphs in a better manner. If price is either equal to or even less than minimum average variable cost, the output that would maximize profit is also equal to zero. This is depicted in this curve of Figure 8.6.
In case of competitive firms, when short run supply curve is taken into consideration, curves of these firms move upward and with increase in marginal cost – diminishing marginal returns is present in regards to other factors. So if market price rises, those firms that are available in the industry will increase their production levels. So with high price profits rise and total production also increases.
How does a firm respond when there is analteration in input price?
When any commodity’s price changes a firm also changes production level to ensure marginal cost is equal to price rate. But it so happens that both price of inputs as well as price of commodity changes simultaneously.
In Figure 8.7, price of one input rises with rise in marginal cost curve that shifts its place. It can be seen that production beyond q2 would reduce profit levels, and that becomes profit maximizing level.
Hence, it is important to note what is the profit rate and how to deal with it.