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The short-run supply curve for a perfectly competitive firm is the marginal cost curve at and above the shutdown point. Portions of the marginal cost curve below the shutdown point are not part of the SR {\displaystyle {\text{SR}}} supply curve because the firm is not producing any positive quantity in that range.
The marginal revenue curve is downward sloping and below the demand curve and the additional gain from increasing the quantity sold is lower than the chosen market price. [22] [23] Under monopoly, the price of all units lowers each time a firm increases its output sold, this causes the firm to face a diminishing marginal revenue. [24]
If the industry is perfectly competitive (as is assumed in the diagram), the firm faces a demand curve that is identical to its marginal revenue curve (), and this is a horizontal line at a price determined by industry supply and demand.
On the other hand, a competitive firm by definition faces a perfectly elastic demand; hence it has = which means that it sets the quantity such that marginal cost equals the price. The rule also implies that, absent menu costs , a firm with market power will never choose a point on the inelastic portion of its demand curve (where ϵ ≥ − 1 ...
A short-run marginal cost (SRMC) curve graphically represents the relation between marginal (i.e., incremental) cost incurred by a firm in the short-run production of a good or service and the quantity of output produced. This curve is constructed to capture the relation between marginal cost and the level of output, holding other variables ...
In the long run a firm operates where marginal revenue equals long-run marginal costs, but only if it decides to remain in the industry. [30] Thus a perfectly competitive firm's long-run supply curve is the long-run marginal cost curve above the minimum point of the long-run average cost curve. [31]
A perfectly competitive firm faces a demand curve that is infinitely elastic.That is, there is exactly one price that it can sell at – the market price. At any lower price it could get more revenue by selling the same amount at the market price, while at any higher price no one would buy any quantity.
A perfectly competitive firm charges P = MC, L = 0; such a firm has no market power. An oligopolist or monopolist charges P > MC, so its index is L > 0, but the extent of its markup depends on the elasticity (the price-sensitivity) of demand and strategic interaction with competing firms. The index rises to 1 if the firm has MC = 0.