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Derive Supply Curve from Rising Part of Marginal Cost (MC) Curve |
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Answer» SOLUTION :Derivation of Supply Curve from Rishing Part fo Marginal COST (MC) Curve. Supply curve finds its origin from the rising potion of marginal cost curve in a perfectly completitive market. Referring to the diagram given below, a producer is in equilibrium at point E(not ar point W) as conditions of producer equilibrium are satisfied at point E(Refer to section 8.1 of chapter 8 for details). So at OP price the output produced by the producer is OM. If price is `OP_(1)`, the producer is in equilibrium at point `E_(1)` (MR=MC), therefore he supplies `OM_(1)` at price `OP_(1)`. Further if the price rises to `OP_(2)`, eqilibrium is at point `E_(2)` (MR=MC) and quantity supplied is `OM_(2)`. At `E_(3)` quanity supplied in `OM_(3)`. For profit maximising firm the price must be greater than or equal to AVC because if (i) Price lt AVC, a firm will not produce the firm is not able to recover its variable cost e.g., at price equal to `OP_(0)`, the price charged by the price charged by the firm is less than minimum AVC (OP). Hence the firm will produce zero output. (ii) Price = AVC represented by point E where price = AVC = OP. Hence a firm will produc OM level of output. Here the firm is just able to recover its variable cost. (iii) Price gt AVC represented by points `E_(1)`, `E_(2)` and `E_(3)` then firms increase production. At `E_(1)`, the price (`OP_(1)`) charged by firm is higher than its minimum AVC(OP). Hence a firm will increase production form OM to `OM_(1)` similarly at `E_(2)`, Price gt AVC (`OP_(2)` gt OP) so the firm further increases production to `OM_(2)` and then to `OM_(3)`. Hence we observe that the producer produces and supplies more at higher levels of price which also satisfies law of supply indicating positive relation between price and quantity supplied. The supply curve we OBTAIN from the above diagram would be `EE_(3)` which shows that the firm produces that level of output where market price is greater than or equal to minimum AVC. Thus the firm's MC curve above the minimum AVC curve becomes the firm's supply curve. 
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