# Supply curve when the marginal cost is zero

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

• You may want to look up natural monopolies. Oct 8, 2018 at 8:13
• Im thinking about a competition model Oct 8, 2018 at 8:14
• 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? Oct 8, 2018 at 8:42
• @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 Oct 8, 2018 at 9:10
• 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. Oct 8, 2018 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

Update: Allowing myself to add a link to an article I wrote on the topic:

Start-Up economics: the disrupt model

• You should look into [the Zero Marginal Cost Society]{thezeromarginalcostsociety.com} Aug 6, 2019 at 16:01
• @Brennan I will check. I wrote the answer as an article, I'd happy for a reply on that to link.medium.com/HClMEgOCQY Aug 6, 2019 at 16:17
• The article is interesting! I do not use Medium so I can’t comment on it Aug 6, 2019 at 16:24
• In the short term companies will be willing to sell even if the price is under the average cost, so for homogeneous products in competitive markets with MC=0, the price will go to zero for all quantities. However, nondecreasing marginal costs with high fixed costs usually lead to natural monopolies.
– JonT
Feb 17, 2020 at 17:59
• Then, as I said, the price usually goes to zero. It is a reason why it is hard to charge for goods like e-books and apps in the app store. However, it is complicated. Most zero marginal cost good like apps are not homogeneous, they differ slightly. Therefore you end up in a so called "oligopoly of differentiated products"—somewhere between a monopoly and perfect competition.
– JonT
Feb 18, 2020 at 11:48