Short-run supply

Definition

Short-run supply refers to the amount of goods that firms are willing and able to produce and sell in the market within a limited time frame, given their current resources and production capacity. In this context, firms make production decisions based on the prices they can charge for their goods and their cost structure, while some inputs remain fixed. This concept is critical in understanding how competitive firms respond to price changes and how their individual supply curves are shaped.

5 Must Know Facts For Your Next Test

1. In the short run, firms can only adjust variable inputs while some factors, like capital or land, remain fixed.
2. The short-run supply curve for a competitive firm is derived from its marginal cost curve above the average variable cost.
3. If the market price exceeds the average variable cost, firms will continue producing in the short run even if they are incurring losses.
4. Short-run supply is typically more elastic than long-run supply because firms cannot immediately adjust all production factors.
5. Changes in demand can significantly affect short-run supply, leading to price adjustments as firms react to changes in market conditions.

Review Questions

• How does the short-run supply curve relate to a firm's marginal cost curve, and what does this imply for production decisions?
  • The short-run supply curve is closely linked to a firm's marginal cost curve because it reflects the prices at which the firm is willing to produce additional units of output. Specifically, the firm will produce as long as the market price is above its average variable cost, which ensures that it covers its variable expenses. Thus, when marginal cost equals market price, the firm maximizes profit or minimizes losses by adjusting output accordingly.
• Discuss how changes in demand impact short-run supply decisions for competitive firms in a market.
  • When demand for a good increases, competitive firms may find themselves in a position where they can raise prices without losing customers. This increase in price incentivizes firms to produce more in the short run by increasing output levels until their marginal cost aligns with the new higher price. Conversely, if demand decreases, firms may cut back on production since maintaining output could lead to losses, especially if prices fall below average variable costs.
• Evaluate the implications of short-run supply on market equilibrium and price stability in competitive markets.
  • Short-run supply plays a crucial role in determining market equilibrium and influencing price stability. When firms respond to changes in demand through adjustments in their short-run supply, it can lead to fluctuations in market prices. If there is a sudden increase in demand and supply cannot immediately adjust due to fixed inputs, prices will rise until a new equilibrium is reached. Over time, as firms adjust their production capacity in response to sustained changes, this may lead to long-term shifts in supply and potentially stabilize prices at a new equilibrium.

Related terms

Marginal Cost:

The additional cost incurred by producing one more unit of a good or service.

Market Equilibrium:

The point where the quantity of a good supplied equals the quantity demanded at a particular price.

Price Elasticity of Supply:

A measure of how much the quantity supplied of a good responds to a change in its price.