Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 8] PRICE AND OUTPUT UNDER PERFECT COMPETITION 203
(b)
(c)
The firm’s short-run supply curve is given by the rising portion of its MC curve over and above its AVC curve.
If the supplies of inputs to the industry are perfectly elastic (that is, if the prices of factors of production remain
the same regardless of the quantity of factors demanded per unit of time by the industry), then the market or
industry short-run supply curve is obtained by the horizontal summation of the SMC curves (over and above
their respective AVC curves) of all the firms in the industry. (See also Section 2.8.) To be noted is that when a
single firm expands its output (and demands more factors), it is reasonable to expect that factor prices will
remain unchanged. However, when all firms together expand output (and demand more factors), factor
prices are likely to rise (see Problem 8.13).
If the short-run equilibrium market price of the commodity is $9, each of the 100 identical firms in the industry
will produce and sell 5000 units of output (point C) and the total for the industry will be 500,000 units. At the
commodity price of $18, each firm produces and sells 7000 units. The industry total is 700,000 units. No
output of the commodity is produced at prices below $5 per unit (i.e., below the shut-down point, the
supply curves coincide with the price axis).
8.13 Suppose that as the commodity price increases from $9 to $18 in Problem 8.12, factor prices also rise,
causing the MC curve of each firm to shift up, say, by a vertical distance of $5. (a) With the aid of a
diagram, determine the quantity supplied by each firm and by the industry at the commodity price of
$18 and (b) compare this result with that of Problem 8.12.
(a)
(b)
As the industry output is expanded (and more inputs are needed), the prices of the variable inputs may rise.
This would cause the MC curve of each firm in the industry to shift up and to the left. In this problem we are
told that the MC curve of each firm shifts up from MC to MC 0 (see Fig. 8-17). Thus when the commodity price
rises from $9 to $18, the quantity supplied by each firm will rise from 5000 units (point C on MC) to 6000 units
(point B 0 on MC 0 ) and the industry output rises from 500,000 units per time period (point C) to 600,000 units
(point B 0 ).
For the same increase in the commodity price (from $9 to $18), the output of each firm, and the output of the
industry rise less when factor prices rise than when they do not. (In Problem 8.12, we saw that when factor
prices remain unchanged, the output of each firm rose from 5000 to 7000 units and the industry output
rose from 500,000 to 700,000 units.)
Fig. 8-17
8.14 (a) Explain the sequence of events leading to the expansion of output when the commodity price rises in
Problem 8.13(a). (b) Must the output of each of the 100 identical firms producing the commodity rise?
Why? (c) What different results do we get in times of cost-push inflation?