Derivation of the supply curve example
The firms in the market will find it viable and more profitable to change their output when the price of the inputs increases. The firm will adjust its output until the point where the marginal costs is equal, to the marginal revenue. We assume that the firms in this market are operating under the perfectly competitive market. The marginal revenue is therefore equal to the price of the commodities. we consider an example of wheat farming in Argentina. Assuming that the prices of 10 pound of wheat varies from either $ 20 to $ 10 or Varies from$ 20 to $ 30.Therefore when the prices of wheat increases from $20 to $ 30 the total output will increase. The farmer is motivated to increase production since the profits acquired has increased. The costs of production remains the same but there is an increase in the amount of revenue implying that for each additional unit of costs that is a large there increase in the amount of revenue acquired. The farmers supply curve will therefore expand driving the overall supply in Argentina to a new high. If the prices of wheat decrease from $ 20 to $10 in the market the farmer will find it difficult to make enough profit or even cover up all the costs in wheat farming. This way the farmer reduces the amount of production thereby reducing the total supply in the market. The farmers individual supply curve will therefore reduce. If the effect is felt by all the farmers in Argentina it means that the overall wheat supply in Argentina at that specified time will reduce dramatically.
If we assume that the total average cost is $20 and that the average variable cost is increasing. The optimal level of production when the prices of commodity is $10 is the point where the marginal costs curve cuts the marginal revenue from below (when marginal cost is equal to $10).At this point the revenue acquired by the company is less than the total costs. The revenue can therefore be used to cover all the variable costs in production. Thus when the price of wheat is $10 it means that the company is making losses but it will have to continue producing in the short run. At this point the revenue of one unit is greater than the variable costs of producing that one unit.
The short run supply curve therefore is given by the quantity of output that the firm is producing at different prices in the short run. Therefore the short run supply curve is given by the marginal costs curve that is above the average variable costs. In the long run a firm will have to cover all its total expenses both the variable and the fixed costs. At this point the marginal revenues must be greater than the marginal cost. Therefore the long run supply curve is given by the marginal costs curve that is above the average total costs.