definition corresponds in terms of its parameters to the definition of demand
given in Chapter 3. In order to derive the firm’s supply curve we must make the
assumption that the firm wishes to maximize profit. In order to do this it must
produce the output where marginal revenue equals marginal cost, as with any
firm. Since the firm is a price-taker the marginal revenue is given by the price;
thus the firm maximizes profit by producing the output where price equals
marginal cost. It was seen in Chapter 6 that this curve was generally upward-sloping
in the short run. Therefore, the firm will tend to produce more output
as the market price increases, and its supply curve will be its marginal cost
curve, as shown in Figure 8.1(ii). More precisely, the firm’s short-run supply
curve will be that part of its marginal cost curve that lies above the average
variable cost (AVC) curve; if the price falls below the minimum level of (AVC) the
firm will shut down production, since it will not be able to cover its variable
costs let alone make any contribution to fixed costs.
c. The industry’s demand function
As explained in Chapter 3, this can be viewed as the sum of all the individual
consumers’ demand functions; graphically, these are summed horizontally.
d. The industry’s supply function
This is obtained by summing the supply functions of all the individual firms in
the industry; this is again a horizontal sum when represented graphically.
However, this is actually an oversimplification, since when the behavior of
firms is aggregated this has an effect on input prices, bidding them up.