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Supply curve- perfectly competitive market

In a perfectly competitive market, the marginal cost curve depicts the firm’s supply curve.
Let us see this with the help of an example as below.

Marginal cost and supply curves for a price-taking firm

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Suppose the market price of a product is ₹ 20 and D1 is the demand curve. We know, MR = MC, thus at price ₹ 20, the firm supplies Q1 output. If the market price is ₹ 30, the corresponding demand curve is D2 and the quantity supplied is Q2 and so on.
The firm’s MC curve above AVC is nothing but the firm’s supply curve, which gives the quantity that the firm will supply at each price.
  • Price < AVC - the firm will supply zero units, because the firm is unable to meet its variable cost.
  • Price = AVC, there are no profits or losses and the firm is just able to meet its variable cost and its losses are equal to fixed costs.
Thus, in perfect competition, the firm’s MC curve above AVC has the identical shape of the firm’s supply curve.

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