its variable costs We can even think of a firm’s decision to close at the end of the day as a kind of shutdown point; the firm makes this choice because it does not anticipate that it will be able to cover its variable cost overnight It expects to cover those costs the next morning when it reopens its doors Marginal Cost and Supply In the model of perfect competition, we assume that a firm determines its output by finding the point where the marginal revenue and marginal cost curves intersect Provided that price exceeds average variable cost, the firm produces the quantity determined by the intersection of the two curves A supply curve tells us the quantity that will be produced at each price, and that is what the firm’s marginal cost curve tells us The firm’s supply curve in the short run is its marginal cost curve for prices above the average variable cost At prices below average variable cost, the firm’s output drops to zero Panel (a) of Figure 9.10 "Marginal Cost and Supply" shows the average variable cost and marginal cost curves for a hypothetical astrologer, Madame LaFarge, who is in the business of providing astrological consultations over the telephone We shall assume that this industry is perfectly competitive At any price below $10 per call, Madame LaFarge would shut down If the price is $10 or greater, however, she produces an output at which price equals marginal cost The marginal cost curve is thus her supply curve at all prices greater than $10 Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 490