Marginal cost and supply curve relationship

Marginal Cost and Supply | Open Textbooks for Hong Kong

marginal cost and supply curve relationship

A supply curve tells us the quantity that will be produced at each price, and that is what the firm's marginal cost curve tells us. The firm's supply. This relationship yeilds the supply curve, a fundamental notion of economics. The concept underlying the supply curve is the increasing marginal costs faced. The portion of the marginal cost curve above its intersection with the average variable cost curve is the supply curve The one-to-one relationship simply is absent in the case of a monopoly.

Adding the quantities supplied by all the other firms in the market, suppose we get a quantity supplied ofNotice that the market supply curve we have drawn is linear; throughout the book we have made the assumption that market demand and supply curves are linear in order to simplify our analysis.

Looking at Figure 9. Provided there are no external benefits or costs in producing a good or service, a perfectly competitive market satisfies the efficiency condition. Economic profit is maximized at the output level at which the slopes of the total revenue and total cost curves are equal, provided that the firm is covering its variable cost. To use the marginal decision rule in profit maximization, the firm produces the output at which marginal cost equals marginal revenue.

Economic profit per unit is price minus average total cost; total economic profit equals economic profit per unit times quantity. If price falls below average variable cost, the firm will shut down in the short run, reducing output to zero.

Marginal cost - Wikipedia

The lowest point on the average variable cost curve is called the shutdown point. Assume that Acme Clothing, the firm introduced in the chapter on production and cost, produces jackets in a perfectly competitive market. Now, using the marginal cost and average total cost curves for Acme shown here: Supply Curve The Supply Curve The first law of supply states that as the price of a product increases the quantity supplied will increase.

marginal cost and supply curve relationship

This relationship yeilds the supply curve, a fundamental notion of economics. The concept underlying the supply curve is the increasing marginal costs faced by industries and firms. Marginal cost is the cost of an additional unit.

Why Is a Supply Curve Referred to as a Marginal Cost?

We could also look at the average marginal cost of 10, additional units. At higher scales we can look at whole industries and determine the marginal cost of 1, more units, which might be the cost of building additional factories or establishing additional firms.

Scarce natural resources might be easy to gather at first, but become much harder as more people collect them think of the California Gold Rush or of too many people fishing in one lake.

marginal cost and supply curve relationship

The need to hire additional management or manage additional people can cause more inefficiencies. The marginal cost curve is U-shaped as a direct consequence of increasing, then decreasing marginal returns.

As a profit-maximizing zucchini producer, Phil produces the quantity of zucchinis that equates the going market price with marginal cost. Phil's supply response to changing prices can be observed by What might Phil do if he faces different prices.

Consider a higher price.

marginal cost and supply curve relationship

This higher price induces Phil to increase his quantity supplied from 7 to almost 8. Once again, a higher price motivates Phil to increase his quantity supplied. Does Phil reduce the quantity supplied if the price declines? Up to a point. If the price falls below this level, then Phil shuts down production in the short run, incurring a lost equal to total fixed cost.

marginal cost and supply curve relationship

The conclusion from this analysis is that the marginal cost curve that lies above the average variable cost is Phil's short-run supply curve. A click of the [Short-Run Supply] button highlights Phil's zucchini supply curve. Only Perfect Competition This short-run supply curve explanation relies on Phil being a perfectly competitive price taker.

Why is marginal cost the supply curve? - The Student Room

The marginal cost curve is a supply curve only because a perfectly competitive firm equates price with marginal cost. This happens only because price is equal to marginal revenue for a perfectly competitive firm.

marginal cost and supply curve relationship

As such, the marginal cost curve is NOT the firm's supply curve.