Firm Supply Curve

Market supply curves are the sum of supply for individual firms at various prices. The perfectly competitive firm's short-run supply curve corresponds to that portion of the marginal cost curve that lies above the average variable cost curve. Because P = MR under perfect competition, the quantity supplied by the perfectly competitive firm is found at the point where P = MC, so long as price exceeds average variable cost.

To clarify this point, consider the options available to the firm. Profit maximization always requires that the firm operate at the output level at which marginal revenue equals marginal cost. Under perfect competition, the firm will either produce nothing and incur a loss equal to its fixed costs, or it will produce an output determined by the intersection of the horizontal demand curve and the marginal cost curve. If price is less than average variable costs, the firm should produce nothing and incur a loss equal to total fixed cost. Losses will increase if any output is produced and sold when P < AVC. If price exceeds average variable cost, then each unit of output provides at least some profit contribution to help cover fixed costs and provide profit. The minimum point on the firm's average variable cost curve determines the lower limit, or cutoff point, of its supply schedule.

This is illustrated in Figure 10.6. At a very low price such as $1, MR = MC at 100 units of output. The firm has a total cost per unit of $2 and a price of only $1, so it is incurring a loss of

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