in a perfectly competitive market, an increase in market price shifts the marginal revenue curve

Many of the reasons that supply curves shift relate to underlying changes in costs. In other words, the marginal cost curve above the minimum point on the average variable cost curve becomes the firm’s supply curve. This rule means that the firm checks the market price, and then looks at its marginal cost to determine the quantity to produce-and makes sure that the price is greater than the minimum average variable cost.

Now, think about what it means to say that a firm will maximize its profits by producing at the quantity where P = MC.

A firm checks the market price and then looks at its supply curve to decide what quantity to produce. To understand why this perhaps surprising insight holds true, first think about what the supply curve means. What do Marginal Costs and the Supply Curve look like for a Perfectively Competitive Firm?įor a perfectly competitive firm, the marginal cost curve is identical to the firm’s supply curve starting from the minimum point on the average variable cost curve.

In a perfectly competitive market, an increase in market price shifts the marginal revenue curve