SUPPLY CURVE OF PERFECTLY COMPETITIVE INDUSTRY

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SUPPLY CURVE OF PERFECTLY COMPETITIVE INDUSTRY

Concept of Supply Cline

l’he supply curve or an industry depicts the various quantities (If the product that it would offer to sell at various prices at a given time. TIle quantities that the industry can offer to sell will depend on the pIece or its good in relation to the cost conditions or the firms. The cost conditions. III their turn, depend on the prices of the factors or production or inputs used by the firms and their production function. Hence. the supply of the industry will change not merely when the price of its good changes. but also as a result or a change in the production functions. This gives us the supply function or the industry as under :
SA =!(P ‘” PX’ Py• Pz I’Fl
Here
S,\ is the quantity or the good A supplied. r represents the functional relationship. i.C’., varies with .
P;’ is the price of the good A.
P,. I’y and P, arc the prices of the factors used in production.
PF represents all the production functions of the firms.
Thus. the factor prices and the production functions arc the parameters IlJ the supply) curve. That is, any change in the factor prices or the production functions will shift the supply curve to a new position. fur this will mean a change in the very condition of supply (i.e .. the supply function). For instance, a shift in the supply curve the right of the original supply curve will mean that owing to improvement in technology or to a fall in the factor prices. the industry is now in a position 10 supply a larger output at every price of its good. In other words. it is prepare to supply any output at a lower price than before. A rise in factor prices will have the opposite effect.

curve is relevant only to perfect or pure competition. and not to cases of imperfect CI mpctition, namely. monopolistic competition. 11l0llQ{Xl1} and oligopoly. The reason is obvious. In the discu iun of supply curve. we say how a firm adjust (increases or decreases) its output in response to change in price. To a firm under perfect competition price IS given; it l”111lnot influence it in any manner; it has to accept it. The only thing that a firm can do is to adjust its supply to the prevailing price. Thus. under competition a firm is a quantity-adjuster. But under various forms of imperfect competition. e.g., imperfect competition or absolute monopoly. the firm can ct its own price. Price- output determination is under its control. There is no question of adjusting output or upply to a given price as under perfect competition, but of choosing that price-output which maximize its profit. As professor Baumel observes, the supply curve is. strictly speaking. a concept which is usually relevant only for the case of pure (or perfect) competition …. The reason for this lies in its definition the supply curve is designed to answer questions of the form. “UI’W much will firm A supply if it encounters a price which is fixed at P dollars'”. But such a question is most relevant to the behaviour of firms that actually deal with pi ices over whose determination they exercise 110 influence”. This situation is that of perfect competition and not any form of imperfect competition. We shall now study both the short-run and long, run supply curves Cora competitive industry

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SUPPLY CURVE OF PERFECTLY COMPETITIVE INDUSTRY