Question

Derive a market supply curve from two hypothetical individual supply schedule.

Draw a supply curve of firm A and firm B. Diagrammatically explain how an industry supply curve is a horizontal summation of individual supply curves.

Answer 1

Panel (i) displays the firm 'A''s supply curve (SS_A), while Panel (ii) displays the firm 'B''s supply curve (SS_B). We have combined the separate supply curves (SS_A and SS_B) of the two companies ('A' and 'B') to create the market supply curve (SS_M) in Panel (iii). Since we display the quantity supplied horizontally, we have inserted the two separate supply curves, SS_A and SS_B, horizontally. Let's clarify. For instance, firm A supplies P₁A₁ at price OP₁, whereas firm B is willing to supply P₁A₂ in quantity. Consequently, the two companies together are willing to supply P₁A quantity at OP₁ price [P₁A₁ + P₁A₁ = P₁A in Panel (iii)]. We now have one point on the market supply curve (point A). The industry's willingness to supply P₂B is also indicated by point B, which corresponds to the OP₂ price (P₂B₁ + P₂B₂ = P₂B). In Panel (iii), we obtain the market supply curve SSM by combining points A and B. A market supply curve typically slopes from left to right and is upward (positive), signifying a direct relationship between supply and price. An industry's supply curve is another name for a market supply curve.