Since a price-taking firm maximizes its profit by selecting a quantity where the market price equals its marginal cost (P = C'(Q)), this equation also functions as the firm's inverse supply function. Graphically, the marginal cost curve represents the firm's supply curve, indicating the quantity it will produce at any given price. Consequently, if the market price fluctuates, the firm will adjust its output level by moving to a new point along its marginal cost curve.

The Marginal Cost Curve as the Price-Taking Firm's Inverse Supply Curve

A price-taking firm's profit-maximizing output adjusts based on the prevailing market price. The decision rule is to produce the maximum quantity for which the marginal cost is less than or equal to the market price. This principle is central to determining the optimal production level, as illustrated by the bakery's response to a price of €2.35 in Figure 8.8.

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In a state of competitive market equilibrium, a firm operates as a price-taker, meaning it accepts the established market price rather than setting its own. The firm's key decision is to choose a production quantity. This choice is determined by the firm's marginal cost of production in relation to the market price.

Deciding Production Quantity as a Price-Taker

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

A firm's production costs are comprised of fixed and marginal costs. Fixed costs are expenses that remain constant regardless of output volume, such as expenditures on premises and equipment. In contrast, marginal costs are the variable expenses incurred to produce one additional unit, such as the cost of ingredients and employee time for baking an extra loaf of bread.

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