Question

Why is the industry supply curve in a perfectly competitive market flat at a minimum average cost curve point?

Answer 1

In the long run, the supply curve depends on whether the firm is operating on increasing cost, decreasing cost or constant cost. Accordingly, the supply curve will be upward sloping, downward sloping or horizontal, respectively. When the industry settles down after entry and exit of firms in the long run, all the firms operating in the market will have similar cost structures. Each firm will produce where MC inersects AC at the lowest point, that is, it will operate efficiently. In the case of a constant cost, the supply curve will be horizontal and intersecting at the minimum point of AC curve. It means that at any quantity the firm will supply, the price will be the same.