Perfect Competition and Firm's Supply Curve

Perfect competition is a market structure where many firms sell identical products, and entry and exit into the market is easy. In this market structure, the firms are price takers, meaning that they cannot influence the market price of their product. The firms aim to maximize their profit by producing at a level where their marginal cost equals the market price.

Firm's Supply Curve

The firm's supply curve shows the quantity of a good or service that a firm is willing and able to produce and sell at different prices. In the short run, a firm's supply curve is closely related to its marginal cost curve. The firm will produce as long as the price is greater than or equal to the marginal cost of production.

Firms' Supply Curve and AVC

In perfect competition, the firms' supply curve above AVC has the identical shape of the firm's marginal cost curve. This is because:

- A firm will not produce if the price is less than the average variable cost (AVC) because it will be making a loss.
- A firm will produce as long as the price is greater than or equal to the AVC.
- The point where the marginal cost curve intersects the AVC curve is the shutdown point of the firm.

Therefore, in the short run, the firm's supply curve above AVC is its marginal cost curve. This is because the firm will only produce when the price is greater than or equal to the AVC. If the price is above the AVC, the firm will produce at a level where its marginal cost equals the market price.

Conclusion

In perfect competition, the firms' supply curve above AVC has the identical shape of the firm's marginal cost curve. This is because a firm will only produce when the price is greater than or equal to the AVC. The firm will produce at a level where its marginal cost equals the market price.