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For any competitive market, why the supply curve is closely related to the firm’s costs of...

For any competitive market, why the supply curve is closely related to the firm’s costs of production in that market?

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Answer #1

A competitive market cannot influence the price. What it can control is the amount of good supplied. Since supply curve relates price and quantity supplied and that price is always fixed and is equal to marginal cost, a typical firm looks at its marginal cost for what it can supply. It must produce according to P = MC which suggests that MC becomes the supply curve. Hence supply curve is closely related to the firm’s marginal costs of production especially its rising portion above the minimum of AVC.

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