Supply Curve What are the differences between fixed and vari

Solution

variable cost A variable cost is a company\'s cost that is associated with the amount of goods or services it produces. A company\'s variable cost increases and decreases with the production volume.

Fixed Costs

On the other hand, a fixed cost does not vary with the volume of production. A fixed cost does not change with the amount of goods or services a company produces.

The supply curve is the relationship between the market price and the number of units the firm will sell.

The marginal cost curve tells us, for a given level of production, how much it costs the firm to produce the last little bit of production. We assume this curve is upward sloping.

Now, suppose we know the market price P. The firm can produce and sell as much as it wants at this price. Suppose we guess the firm chooses quantity Q*. How can we check if our guess is correct? Suppose that when producing Q* total output, the marginal cost MC(Q*) is less than P. Is the firm happy with this choice? No, because if they sell a bit more, the extra bit they sell is profitable, because the extra production cost is less than the price. So choosing Q* where MC(Q*) < P isn’t a good prediction.

Similarly, if MC(Q*) > P, the firm isn’t happy, because the last bit of production was a money loser. The only time a prediction makes sense is if MC(Q*) = P. Then, the firm is breaking even on the last bit of production (and making money on all the rest). So they have no reason to either increase production or decrease it.