The Relationship Between the Supply Curve and Marginal Cost Curve

The statement that the supply curve is the rising portion of the marginal cost curve over and above the minimum of the average variable cost curve is generally accurate. However, it is important to understand the relationship between these curves and the reasons behind it.

Understanding the Marginal Cost Curve

The marginal cost curve represents the additional cost incurred by a firm to produce one more unit of output. It reflects the changes in variable costs, such as labor and raw materials, as production levels increase. The marginal cost initially decreases due to economies of scale, but eventually starts to rise due to diminishing marginal returns.

Understanding the Average Variable Cost Curve

The average variable cost curve represents the average cost per unit of output that varies with the level of production. It includes both variable costs (such as labor and raw materials) and fixed costs (such as rent and utilities). The average variable cost curve is U-shaped, initially decreasing due to economies of scale and eventually increasing due to diminishing marginal returns.

The Supply Curve as the Rising Portion of the Marginal Cost Curve

The supply curve represents the relationship between the price of a good or service and the quantity that producers are willing and able to supply. It is derived from the marginal cost curve and reflects the behavior of firms in the market.

The supply curve is generally upward-sloping, meaning that as the price increases, producers are willing to supply more units of a good or service. This is because higher prices allow firms to cover their increasing marginal costs and potentially earn higher profits. Therefore, the supply curve is the rising portion of the marginal cost curve.

Reasons behind the Relationship

There are several reasons why the supply curve is the rising portion of the marginal cost curve over and above the minimum of the average variable cost curve:

1. Profit Maximization: Firms aim to maximize profits by producing at a level where marginal cost equals marginal revenue. As marginal costs rise, firms require higher prices to cover those costs and maintain profitability.

2. Opportunity Cost: As production increases, firms may need to allocate more resources, such as labor and capital, which have alternative uses. The opportunity cost of using these resources for one product increases, leading to higher marginal costs.

3. Diminishing Returns: In the short run, firms may experience diminishing marginal returns, meaning that additional units of input yield smaller increases in output. This leads to higher marginal costs as production levels increase.

Conclusion

In summary, the supply curve represents the rising portion of the marginal cost curve over and above the minimum of the average variable cost curve. This relationship is based on the profit-maximizing behavior of firms, the opportunity cost of resources, and the effects of diminishing marginal returns. Understanding this relationship is crucial for analyzing market equilibrium and the behavior of firms in response to changes in price and production levels.

It is very much in the syllabus. The following is a possible answer to it.