Firm Supply

How a competitive firm chooses output

A price-taking firm takes the market price \(P\) as given and picks \(q\) to maximize profit. The rules:

  • Produce where \(P = MC\) — on the upward part of marginal cost.
  • Shut down if \(P <\) min AVC — if price can’t even cover average variable cost, produce 0 (you lose less by stopping).
  • So the firm’s supply curve = the MC curve above minimum AVC.
  • Profit = \((P - ATC)\times q\): positive if \(P >\) ATC, a loss if min AVC \(< P <\) ATC (still operate — you cover some fixed cost), zero at \(P =\) min ATC (break-even).

Try it. Slide the price. Watch the firm ride up its MC curve, the profit/loss rectangle flip color, and production drop to zero once price falls below the shutdown line.

▬ MC ▬ AVC ▬ ATC

What to notice

  • The firm’s output rides up the MC curve as price rises — that’s why supply = MC (above shutdown).
  • Between min AVC and min ATC, the firm makes a loss but still produces — it covers variable cost plus part of fixed cost. The rectangle is red but output is positive.
  • Drop price below the shutdown line → output jumps to 0. That’s the lower end of the supply curve.