Short-Run Supply — AP Microeconomics
1. Core Definition of Short-Run Supply ★★☆☆☆ ⏱ 3 min
Short-run supply describes the quantity of output a perfectly competitive firm (or market) will produce at every possible market price in the short run. The short run is defined as the period where at least one input (typically capital, factory size, or lease agreements) is fixed, and new firms cannot enter or exit the market. This topic is specific to perfectly competitive markets, because firms in imperfect competition do not have a well-defined supply curve. It makes up roughly 4–6% of total AP Microeconomics exam points.
2. The Short-Run Shut-Down Rule ★★★☆☆ ⏱ 4 min
In the short run, fixed costs are sunk: they must be paid regardless of whether the firm produces output or shuts down. This means the firm’s decision to operate or shut down depends only on whether operating generates enough revenue to cover variable costs (costs that change with output, like labor and raw materials).
- If the firm shuts down, it loses all its total fixed cost ($TFC$)
- If it operates, it loses $TFC$ minus any excess revenue it earns after covering variable costs ($TR - TVC$)
\text{Operate if } P \geq AVC; \quad \text{Shut down if } P < AVC
where $AVC = \frac{TVC}{Q}$ is average variable cost *at the profit-maximizing quantity*. The minimum value of AVC across all quantities is the cutoff price: any price below $AVC_{min}$ will always result in a shut down.
Exam tip: Always compare $P$ to $AVC$ at the profit-maximizing quantity, not just the minimum AVC, and never use ATC for short-run shut-down decisions. ATC includes fixed cost, which is sunk and irrelevant to the short-run decision.
3. The Firm's Short-Run Supply Curve ★★★☆☆ ⏱ 4 min
For a perfectly competitive firm, the profit-maximizing quantity at any price is found by setting $P = MC$, because $MR = P$ for price-taking firms. Combining this with the shut-down rule, we get the definition of the firm’s short-run supply curve.
This one-to-one relationship between price and quantity supplied is unique to perfect competition: in imperfect competition, firms set price instead of taking it, so no well-defined supply curve exists.
Exam tip: If asked to draw the short-run supply curve on a graph, explicitly label the kink at the minimum of AVC, and do not label the portion of MC below AVC as part of supply. Examiners always check for this distinction.
4. The Short-Run Market Supply Curve ★★★☆☆ ⏱ 3 min
In the short run, the number of firms in the market is fixed: entry of new firms and exit of existing firms only occur in the long run, because new firms need time to build production capacity and existing firms cannot exit to avoid fixed costs in the short run.
To derive the short-run market supply curve, we horizontally sum the supply curves of all individual firms in the market. For any given price, we add up the quantity supplied by each individual firm to get total market quantity supplied. For $n$ identical firms, this simplifies to multiplying the individual firm quantity by $n$.
Q_{\text{market}}(P) = \sum_{i=1}^{n} Q_i(P)
Since every individual firm’s MC curve is upward sloping, the short-run market supply curve is also always upward sloping.
Exam tip: Do not adjust the number of firms when calculating short-run market supply, even if firms earn negative economic profit. Entry and exit are long-run adjustments, so the number of firms is always fixed for short-run problems.
5. Concept Check ★★★☆☆ ⏱ 3 min
Common Pitfalls
Why: Students confuse the short-run shut-down rule with the long-run exit rule, where exit occurs when $P < ATC$.
Why: Students forget that the firm shuts down and supplies zero when $P$ is below minimum AVC.
Why: Students mix up short-run and long-run market adjustments, where entry/exit change the number of firms in the long run.
Why: Students memorize the minimum AVC cutoff but forget AVC rises at higher quantities, so AVC can be above $P$ even if $P$ is above the minimum AVC.
Why: Students think shutting down means no costs, but fixed costs are sunk and must still be paid in the short run.