Competitive firms will adjust the quantity supplied until marginal cost equals price.

Question

Quizplus · Accepted Answer

This is a fundamental principle of competitive markets and is known as the profit-maximizing rule. When a firm produces a product, it will continue to increase output until the marginal cost (the cost of producing one additional unit) equals the price it can sell that unit for. If the price is higher than the marginal cost, the firm will continue to produce and sell more units, as it can earn a profit on each additional unit produced. If the price is lower than the marginal cost, the firm will decrease production or may even stop production altogether if the price is lower than the minimum of average variable cost.

Competitive Firms Will Adjust the Quantity Supplied Until Marginal Cost