below the shutdown point where MC crosses AVC. At any price like this one, the firm will shut down

immediately, because it cannot even cover its variable costs.

Marginal Cost and the Firm’s Supply Curve

For 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. To understand why this perhaps surprising insight

holds true, first think about what the supply curve means. A firm checks the market price and then looks at its

supply curve to decide what quantity to produce. Now, think about what it means to say that a firm will

maximize its profits by producing at the quantity where P = MC. 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. In other words, the marginal cost curve above the
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