The supply curve is built as the average marginal cost (MC), when the MC is equal or higher than the average cost (AC) The marginal cost increases, as a result of the opposite effect of marginal production In this case, we get a supply curve that's rising from left to right: higher cost per rising quantity

In the case of marginal cost of zero, I can think of no other case than a supply curve that is equal to AC, and that the AC is dropping, since fixed costs do not change as a result of quantity And so, we'll receive a curve that's dropping from left to right: lower cost per rising quantity

Real life cases can be broadcast tv, surpluses in production, "internet economy" etc.

Am I wrong in my assumption? Is there any reference of this type of equilibrium ? Is it a stable equilibrium ? I mean, since the marginal cost is zero, there is no impact on increasing demand

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    $\begingroup$ You may want to look up natural monopolies. $\endgroup$ – BB King Oct 8 '18 at 8:13
  • $\begingroup$ Im thinking about a competition model $\endgroup$ – Guy Louzon Oct 8 '18 at 8:14
  • $\begingroup$ The case you describe with zero marginal costs and high fixed costs is very interesting and well studied. Nevertheless, it is not a case that allows for much competition. Hence, the term natural monopolies. How many (successful) search engine companies like google are there? $\endgroup$ – BB King Oct 8 '18 at 8:42
  • $\begingroup$ @BBKing a natural monopoly is a state where fixed costs are high in comparison to the market, so competition is not profitable... what's the marginal cost for a blog site? for a satellite tv channel? for a storage platform with vast amount land? and they all live in a competitive world. google is a monopoly because of the network effect $\endgroup$ – Guy Louzon Oct 8 '18 at 9:10
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    $\begingroup$ Network effects indeed play a role, but it seemed to me you were referring to a case with high fixed costs and hence strongly decreasing AC. $\endgroup$ – BB King Oct 8 '18 at 10:55

Took me a bit, but I have figured its out:

The single firm's supply curve is defined as it marginal cost, as long as MC is above it average cost A firm would not sell below its average cost, since it would loae money, Mathmatically we can define, for the single firm S = MAX(AC, MC)

Our basic assumption,for this discussion, is that MC = 0

Under the basic assumption and that costs are positive, obviously, then, the supply curve will always equal AC: S = MAX(AC, 0), AC > 0 S = AC

The other conculsion from the basic assumption is that the production function, under the costs limit, is completely unaffected by quantity Intuitively: its costs the same to produce 100 products and 1000 products.

If the Total costs function, as a function of quantity, is fixed, then the average function is: AC = TC/x

In that case, we'll get a supply curve, though a very special one: It'll decrease price as a result of increasing quantity, and prices will aspire to zero. always


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