The following article will guide you about how to derive the supply curve of the firm.

The supply curve is usually upward sloping from left to right, indicating that, as price increases, a greater quantity of the product will be supplied.

(i) The supply curve of the firm:

The supply curve shows the relation between quantity supplied and market price. For each given price we have to see what quantity will be supplied. Suppose, that a price is specified. Now we have to determine how much each firm will be desir­ous of supplying. Next, a different price is specified and quantity supplied is again determined—and we have to repeat the exercise under all possible prices. For prices above AVC, the firm will equate price and marginal cost in a competitive situation.

Thus, in perfect competition, the segment of the firm’s marginal cost curve that is above the AVC curve is the price-taking firm’s supply curve. This point is illustrated in Fig. 7.

The market supply curve is a summation of all .the individual supply curves of the firms in the industry and so that too will slope upwards from left to right, indicating that, as price rises, quantity supplied will increase, assuming no change in factor prices as the output of the industry expands.

Here point E0, where price p0 equals AVC, is the shut-down point. For prices below Rs. 2, optimum output is zero, because the firm can fare better by producing zero units, rather than a positive quantity. As prices rise from Rs. 2 to Rs. 3 to Rs. 4 to Rs. 5, the firm increases its production from q0 to q1 to q2 to q3. If, e.g., price were Rs. 3, the firm would produce q1 units because, by doing so, it would be able to cover not only variable cost but also a portion of fixed cost.

The firm’s supply curve, shown in (ii), relates market price to the quan­tity the firm will produce and offer for sale. It has the same shape as the firm’s MC curve for all prices above its AVC curve.

(ii) The supply curve of the industry:

Figure 2 illustrates the derivation of an industry supply curve for an example of only two firms.

The impor­tant point to note here is: