(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 318

CHAPTER 8 • Profit Maximization and Competitive Supply 293

Price
(dollars per
unit)

MC

F IGURE 8.6

P2
AC
AVC

P1

THE SHORT-RUN
SUPPLY CURVE FOR
A COMPETITIVE FIRM
In the short run, the firm
chooses its output so that
marginal cost MC is equal to
price as long as the firm covers its average variable cost.
The short-run supply curve
is given by the crosshatched
portion of the marginal cost
curve.

P = AVC

q1

0

q2

Output

The higher price not only makes the additional production profitable, but also
increases the firm’s total profit because it applies to all units that the firm produces.

The Firm’s Response to an Input Price Change
When the price of its product changes, the firm changes its output level to
ensure that marginal cost of production remains equal to price. Often, however,
the product price changes at the same time that the prices of inputs change. In
this section we show how the firm’s output decision changes in response to a
change in the price of one of its inputs.
Figure 8.7 shows a firm’s marginal cost curve that is initially given by MC1 when
the firm faces a price of $5 for its product. The firm maximizes profit by producing

Price, cost
(dollars per unit)

In §6.2, we explain that
diminishing marginal returns
occurs when each additional
increase in an input results
in a smaller and smaller
increase in output.

MC 2

MC 1

F IGURE 8.7

THE RESPONSE OF A FIRM TO A CHANGE
IN INPUT PRICE

$5

When the marginal cost of production for a firm
increases (from MC1 to MC2), the level of output that
maximizes profit falls (from q1 to q2).

q2

q1

Output