Marginal Cost as the Supply of Output
This page describes a relationship between a firm's marginal cost curve (MC) and the firm's supply of the the output. Restated, as the price of the output (MR) rises or falls, profit maximizing quantity of output (where MR = MC) also rises and falls. This idea that a firm will produce and sell a different quantity of output based on the market price of the product is the same idea that the quantity of a product supplied will rise and fall as the market price rises and falls.
Accordingly, the marginal cost curve (MC) is that firm's supply curve for the output; as price of output rises, the firm is willing to produce and sell a greater quantity. Combining the MC curves for all the firms producing the product is the supply curve for the industry.
Graph 25 (Marginal Cost as Supply Curve)
Example to illustrate the impact of technology
Technology shifts the TPP or production function (higher), TVC (lower), and the marginal cost curve (lower). The MC curve illustrates the firm's supply curve for it output. Thus a change in technology shifts the firm's (and the industry's) supply curve.
Graph 30(Impact of Technology)
Graph 31 (Impact of Technology)
An advance in production technology increases supply which puts downward pressure on the market price for the product. Firms that do not adopt the new production technology will experience reduced revenue but without an offsetting reduction in cost.
This relation is described in the determinents of supply, but now we have an understanding of the intermediate steps that lead to that outcome.
- Advances in production technology reduces cost of producing the output. This is illustrated by shifting the MC curve down and to the right. Because the MC curve also illustrates the firm's supply curve for the output, and the shift illustrates why advances in production technology leads to increased supply of the output.
The next section explains strategies a manager may pursue when the business is unprofitable.