Short-run and Long-run Supply curve Under Perfect Competition

Short-run and Long-run Supply curve

In this article we are going to discuss about Short-run and Long-run Supply curve Under Perfect Competition. Micro Economics Notes

Short-run supply curve

The short-run is a period in which the firms can change its supply only upto a certain limit. The firms can vary its supply by changing the variable factors. The firms cannot change its fixed factors i.e. they cannot vary the scale of its plant. Moreover, no new firm can enter into the industry or existing firm can quit the industry in the short-run.

Thus, the number of firms in the industry cannot change in the short-run. The firms can increase the supply by intensively using the fixed equipments with increased employment of the variable factors. Thus, the supply of the industry can be increased only within the limit set by the plant capacity of the existing firms.

In other words, both the demand and the supply have impact on the price in the short-run. But the supply is not stronger than the demand in the short-run. How is the price in the short-run determined through the interaction of short-period supply and demand curve is shown in the following figure.

In the diagram, the initial equilibrium price (OP1) is determined through the interaction between the demand (D1D1) and the supply curve (SS)

When demand increases from D1D1 to D2D2, price goes up from OP1 to OP2 and quantity from QQ1 to QQ2. Thus an increase in demand will raise both the quantity and the price in the short-run.  The short-run equilibrium price is also called the sub-normal price.

Long-run Supply Curve

Long-run is such a period enough to adjust fully the supply of the industry to meet the changes in demand. In the long-run, the firms can enlarge the sizes of the plants and thereby, increase the supply to meet the increased demand for the product. Thus, the shift in demand can be met by greater adjustment in output.

In other words, the supply is more dominant force in the price-determination in the long-run. The supply curve is relatively higher elastic. The equilibrium price determined through the interaction of the demand and the long-run supply curve is called ‘normal price’ under perfect competition. This is shown in the following figure.

Minimum Support Price

Minimum Support Price is an important part of India’s agricultural price policy. The government has fixed support prices for a number of agricultural products, such as wheat, rice, etc. Minimum Support Price is the price at which government purchases crops from the farmers, whatever may be the price for the crops.

The minimum support prices are a guarantee price for their produce from the Government. The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.

In case the market price for the commodity falls below the announced minimum price due to bumper production, government agencies purchase the entire quantity offered by the farmers at the announced minimum price. Minimum support price is a government-established minimum price. The minimum support price holds the market price above its equilibrium level.

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