The P=MC rule and the competitive firm's short-run supply curve. Application of the P=MC rule, as modified by the shutdown case, reveals that the (solid) segment of the firm's MC Curve that lies above AVC is the firm's short-run supply curve. More specifically, at price P1, P=MC at point a, but the firm will produce no output because P1 is less than minimum AVC. At price P2 the firm will operate at point b, where it produces Q2 units and incurs a loss equal to its total fixed cost. At P3 it operates at point c, where output is Q3 and the loss is less than total fixed cost. With the price of P4, the firm operates at point d; in this case the firm earns a normal profit because at output Q4 price equals ATC. At price P5 the firm operates at point e and maximizes its economic profit by producing Q5 units.
The above summarizes the MR=MC approach to determining the competitive firm's profit-maximizing output level. It also shows the equivalent analysis in terms of total revenue and total cost.
The short-run supply curve tells us the amount of output the firm will supply at each price in
a series of prices.