The firm's equilibrium supply of 29 units of output is determined by the intersection of the marginal cost and marginal revenue curves (point d in Figure ). When the firm produces 29 units of output, its average total cost is found to be $6.90 (point c on the average total cost curve in Figure ).
My class IB has just discussed allocative efficiency and hence consumer and producer supply. They explained the concepts with a diagram like this:It all made perfect sense to me until it was mentioned that the supply curve can also be seen as a marginal cost curve. If this is the case, I don't understand why it is only sloping upwards. I know that marginal cost curves (at least at short-term) look something like.But the curve in the first diagram is different.Is is an oversimplification of a real marginal cost diagram, or am I missing something? I'll offer a less algebraic alternative to Alecos's answer. In short, yes and no. The 'no' partNormally the MC and AC curves would look like the following, with MC intersecting AC from below AC's minimum point.
Suppose price $P0$ were below this point. Then the firm would sell at a quantity below $Q1$. But what does this imply for the firm's profit? On average, the firm would make $P0$ per unit sold, but the cost per unit must be higher than $P0$, i.e. At $AC0$ if the firm is selling at $Q0$. This means the firm would be making a loss (negative profit) and no profit maximizing firm would try to operate at this point; they'd be better off shutting down and get zero profit instead.Therefore, a firm's supply curve should be the fraction of its MC curve that's above the AC curve, which is always upward sloping.
The quantity $Q1$ where a firm would start producing is sometimes referred to as the of production. The 'yes' partIn your demand-supply diagram, the supply curve starts from the origin. Imagine this is just as having the red-dash line in the following diagram 'approximating' the part of the MC curve that is below AC - filling the gap, so to speak.