Answer to Question #306951 in Microeconomics for lydia

Question

use a diagram discuss and explain why marginal cost above is minimum average variable cost is called supply curve

Answer 1

Only a completely competitive firm equates price with marginal cost, hence the marginal cost curve is a supply curve. This occurs because, in a fully competitive firm, price equals marginal revenue.

In other words, when the price of the product (MR) rises or decreases, so does the profit-maximizing amount of output (where MR = MC). This notion that a firm would create and sell a varying quantity of output depending on the product's market price is similar to the concept that the quantity of a product provided will increase and fall as the market price does.

As a result, the marginal cost curve (MC) represents that firm's output supply curve; as output prices increase, the firm is prepared to produce and sell more. The supply curve for the industry is created by combining the MC curves for all of the firms that produce the product.

This is shown in the pic below: