• Direct relationship between product price + quantity supplied

• When Price ↑, economic profit ↑
  

Generalized depiction

• If P = min. AVC → Total Revenue just covers TVC; loss = TFC (firm indifferent but we assume firms prefer producing over closing)

• Quantity supplied = 0 at any price below min. AVC as it is in the shutdown zone

• Portion of firm’s MC curve lying above AVC curve is also the short-run supply curve
• Since the firm will not produce when MC<AVC, the MC curve above AVC represents the firm's individual supply curve since it shows the relationship of a firm's output with relative prices.

Diminishing returns, production costs, product supply

• Law of diminishing returns causes marginal cost to decrease at a decreasing rate and eventually rise

• When MC ↑ firms only produce more if price increases with output
• supply only when price is equal to or greater than minimum AVC; meaning that the firm is profitable or that its losses are less than its fixed cost

Changes in supply

• Ceteris paribus, when wages increase MC also increases, shifting the supply curve up and left (indicating a decrease in supply as the cost of resources goes up).
• Similarly, when AVC decreases (i.e. when technological progress increases the productivity of labor), MC is reduced and the supply curve is shifted down and right, representing an increase in supply.
• quantity: produce where MR (P)= MC; profit maximized (TR exceeds TC by a max amount) or loss is minimized.
• If price exceeds ATC, TR will exceed TC.

Firm and industry: equilibrium price
Equilibrium price is determined by total, or market, supply and total demand.

• Market price and profits
  • Equilibrium price: quantity supplied = quantity demanded
  • Firm's econ. profit/loss = TR - TC
    = (equilibrium price × equilibrium quantity) – TC
    = (equilibrium price – ATC) × equilibrium quantity

• Industry econ. profit/loss = econ. profit/loss (firm) × # of firms in industry
  

• Firm vs. industry
  • Individual competitive firm = price taker

Supply plans of all firms as group = basic determinant of product price

Q & A:
Q: Should this firm produce?
A: Yes, if price is equal to, or greater than, minimum average variable cost. This means that the firm is profitable or that its losses are less than its fixed cost.

Q: What Quantity should this firm produce?
A: Produce where MR= P = MC; there, profit is maximized (TR excceds TC by a maximum amount) or loss is minimized.

Q: Will production result in economic profit?
A: If price exceeds average total cost (TR will exceed TC), there will be economic profit. If average total cost exceeds price (TC will exceed TR), there will not.