Question

Please explain the following:

The supply curve of the firm is MARGINAL COST in THE RATIONAL RANGE OF PRODUCTION.

&

A profit maximizing/loss minimizing perfectly competitive firm WILL PRODUCE SO LONG AS ALL VARIABLE COSTS ARE COVERED.

Answer 1

a) The supply curve of a perfectly competitive firm is that portion of its marginal cost curve which covers the average variable cost of production.

A perfectly competitive firm will only produce up to the point where the price of the product is equal to the marginal cost of that product. This is the profit maximisation equation in case of such a firm. This means that perfectly competitive firm will move and change its production according to the change in its marginal cost. So the marginal cost curve of perfectly competitive curve is it's supply curve.

b) A profit maximisation or a loss minimisation perfectly competitive firm will produce till the time it can cover its variable costs.

Firm should stop producing beyond that point because after that it will incur less losses if it stops producing totally. If firm stops producing completely at this point, then it will only have to incur the fixed costs.

But if it continues to produce beyond the point where it cannot cover its variable costs, then it will have to bear the loss of variable and fixed costs both.