Long-Run Market Supply Curve

Definition

The long-run market supply curve represents the relationship between the market price of a good or service and the quantity supplied in the long run, when all factors of production can be adjusted. It shows the minimum price at which firms are willing to supply different quantities of the product in the long run.

5 Must Know Facts For Your Next Test

1. In the long run, all factors of production can be adjusted, allowing firms to change the scale of their operations.
2. The long-run market supply curve is typically upward-sloping, as higher prices incentivize more firms to enter the market and increase production.
3. Firms in a perfectly competitive market will produce up to the point where the market price equals their minimum long-run average cost.
4. Economies of scale can cause the long-run market supply curve to be downward-sloping, as larger firms can achieve lower per-unit costs.
5. The long-run market supply curve reflects the industry's ability to adjust to changes in demand over time, as new firms can enter or existing firms can expand or contract.

Review Questions

• Explain how the long-run market supply curve differs from the short-run market supply curve.
  • The key difference between the long-run and short-run market supply curves is the ability of firms to adjust all factors of production. In the short run, at least one factor is fixed, limiting the firm's ability to change its scale of production. In the long run, all factors can be adjusted, allowing firms to expand or contract their operations in response to changes in market conditions. This flexibility is reflected in the long-run market supply curve, which is typically more elastic (flatter) than the short-run supply curve.
• Describe how economies of scale can affect the shape of the long-run market supply curve.
  • Economies of scale occur when a firm's average costs decrease as its scale of production increases. In a perfectly competitive market, this can lead to a downward-sloping long-run market supply curve. As more firms take advantage of economies of scale, they can produce at lower per-unit costs, allowing them to supply more at a given price. This shifts the long-run supply curve to the right, potentially creating a downward-sloping segment as the market price falls. The presence of economies of scale is a key factor that can influence the shape of the long-run market supply curve in a perfectly competitive industry.
• Analyze how the long-run market supply curve relates to the concept of perfect competition and the firm's profit-maximizing behavior.
  • In a perfectly competitive market, the long-run market supply curve is closely tied to the firm's profit-maximizing behavior. Perfectly competitive firms are price-takers, meaning they must accept the market price and cannot influence it. In the long run, these firms will produce up to the point where the market price equals their minimum long-run average cost. This ensures that they are operating at the most efficient scale of production and maximizing their profits. The long-run market supply curve reflects the collective decisions of these profit-maximizing firms, showing the quantities they are willing to supply at different market prices in the long run. The shape and position of the long-run supply curve is therefore a critical factor in understanding the equilibrium and dynamics of a perfectly competitive market.

Related terms

Short-Run Market Supply Curve:

The short-run market supply curve represents the relationship between price and quantity supplied when at least one factor of production is fixed, typically in the short time period.

Economies of Scale:

Economies of scale refer to the cost advantages that businesses can exploit by expanding their scale of production, leading to a lower per-unit cost as output increases.

Perfect Competition:

Perfect competition is a market structure characterized by many small firms selling identical products, with no firm having the ability to influence the market price.