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Why isn't the supply curve U- shaped if it represents the marginal costs to producers?
Why isn't the supply curve U- shaped if it represents the marginal costs to producers?
Expert Solution
The supply curve isn't a U-shaped curve even if it is same as that of the marginal cost curve. The firms produce on the increasing or upward-sloping portion of the marginal cost curve, as shown in the diagram below. The firm will not supply output at a price below the minimum average variable cost. It is the shutdown point for the firm where the firm is covering just the fixed cost and incur a loss equal to AVC. So, at a price below this, the firm won't be able to cover even its fixed cost and incur losses.
So, if the firm charges a price below the minimum AVC or on the downward-sloping portion of the marginal cost curve, it will have to incur losses. That is why the firm doesn't have a U-shaped supply curve.
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