FIGURE 8 THE SHORT-RUN SUPPLY CURVE FOR A PERFECTLY COMPETITIVE FIRM
If prices fall below P0, the firm will shut its doors and produce nothing. For prices between P0 and P1, the firm will incur losses, but these losses will be less than fixed costs; thus, the firm will remain in operation and produce where MR = MC. At a price of P1, the firm earns a normal return. If price should rise above P1 (e.g., to P2), the firm will earn economic profits by selling an output of q2. The portion of the MC curve above the minimum point on the AVC curve, here thickened, is the firm’s short-run supply curve.