Today's Question
A firm's supply curve shows how much it's willing to produce at each price. For a competitive firm, the supply curve is its marginal cost curve (above a certain point). Why does this make sense? And why is there a 'shutdown point' below which the firm won't produce at all?
Model Answer
Supply = MC because: At any price, the firm produces until MC rises to equal that price. If price is $10, produce until the next unit would cost $11 - stop there. Shutdown point: If price falls below average variable cost, the firm loses money on every unit AND doesn't cover fixed costs. Better to produce nothing, lose only fixed costs, and wait for better prices. Variable costs must be covered to stay open.