Supply
A typical supply function
● Usually continuous, an increasing function and upward sloping because:
○ Economies of scale
○ Entry of new firms causes extensive margin changes and increases the
number of less productive firms, increasing the price
● There are exceptions, e.g. long-run supply in a competitive industry
● In competitive markets, there are many sellers
○ Impact of one individual on the market is minimal
● The long-run is the time when all inputs are variable
○ Illustrates the importance of liquidity, time to build and inertia
Firm’s supply
In the SR
● Firms set their price so that they maximise profits and minimise costs
○ P = c’(q)
○ Does not always give supply, e.g. with very high FC as MC is always
upward sloping
In the LR
● Supply intersects the minimum of AVC and AC
● Depends on production functions and technology
Industry supply
● Can sum the firm’s supply curves to get the industry
supply curve
○ 𝑆(𝑝, 𝑟, 𝑤) = ∑𝑁 𝑖=1 𝑆𝑖 (𝑝, 𝑟, 𝑤)
● Industry supply is dependent on the price of the good and the cost of inputs
○ Could also depend on production technologies
● When summing supply curves horizontally, the angles of the curves should be
the same
A typical supply function
● Usually continuous, an increasing function and upward sloping because:
○ Economies of scale
○ Entry of new firms causes extensive margin changes and increases the
number of less productive firms, increasing the price
● There are exceptions, e.g. long-run supply in a competitive industry
● In competitive markets, there are many sellers
○ Impact of one individual on the market is minimal
● The long-run is the time when all inputs are variable
○ Illustrates the importance of liquidity, time to build and inertia
Firm’s supply
In the SR
● Firms set their price so that they maximise profits and minimise costs
○ P = c’(q)
○ Does not always give supply, e.g. with very high FC as MC is always
upward sloping
In the LR
● Supply intersects the minimum of AVC and AC
● Depends on production functions and technology
Industry supply
● Can sum the firm’s supply curves to get the industry
supply curve
○ 𝑆(𝑝, 𝑟, 𝑤) = ∑𝑁 𝑖=1 𝑆𝑖 (𝑝, 𝑟, 𝑤)
● Industry supply is dependent on the price of the good and the cost of inputs
○ Could also depend on production technologies
● When summing supply curves horizontally, the angles of the curves should be
the same
