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upward sloping curve from left to right
, because greater quantities will be supplied at 
higher prices. 
We usually assume that suppliers aim to maximise their profits, and the upward slope of the supply 
curve reflects this desire to make profit (ie they are prepared to supply more of something, the higher the 
price that is being paid for it). 
5.3 Short run supply curve 
Following the assumption that suppliers are profit maximisers, they will produce at the point where 
marginal costs equals marginal revenue. For now, it is only necessary to note that producing at the level 
of output where marginal revenue equals marginal cost is the profit-maximising position for a firm. 
Therefore, the amount a firm will supply will be affected by the costs of production (marginal and 
average costs).
We will look at supply in both the short run and the long run. 
Short run supply curve 
A firm's short run average cost curve is U shaped, with marginal cost (MC) rising and falling more 
steeply than average cost (AC).
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PART A: THE BUSINESS ORGANISATION, ITS STAKEHOLDERS AND THE EXTERNAL ENVIRONMENT 
 
104
 
If we assume there is a single, constant selling price for all firms, then a firm's average revenue (AR) and 
marginal revenue (MR) will be identical. We can show this as Price = Average Revenue = Marginal 
Revenue.
We know that the firm will supply where MC = MR in order to maximise profit. Consequently, the firm's 
chosen levels of output (forming its supply curve) are as shown in Figure 5 below.
AC
Quantity 
0
Price/
cost
MC = supply
Q
1
P
3
P
2
P
1
D
3
= AR
3
= MR
3
D
2
= AR
2
= MR
2
D
1
= AR
1
= MR
1
Q
2
Q
3
Q
4
AVC
Figure 5 Short run supply curve
We can see that at price P
1 
the firm supplies Q
1
output, because MC = MR
1
. When price rises to P
2
, the 
output increases to Q
2
and so on, provided that the firm has the capacity to increase its sales output. In 
these conditions, the firm's