The competitive firm in equilibrium always chooses the output for which price (AR = MR) = MC is above the level of average variable cost (AVC). The short-run equilibrium price of a competitive firm can be equal to or more than it’s AVC, but, cannot be less than AVC.

The minimum price which can induce a firm to produce in the short-run is the one, which just equals AVC. It is also called the shut down point of the competitive firm. The competitive firm closes down the operation, if it is not in a position to cover AVC in the short-run.

When price = MC, the firm would decrease its profits, if, it either increased or decreased its output. For any point to the left of this equilibrium, price is greater than the marginal cost and it pays to increase output. Similarly, for any point to the right of this equilibrium, price is less than the marginal cost and it pays to reduce output.

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