Final answer:
If the market price of a good is lower than the marginal cost of production, a company would typically not supply the good since it would be unprofitable. However, if the marginal cost is less than or equal to the marginal revenue, producing more units is beneficial as it increases profit, contributing to a producer surplus when market price is higher than what producers would accept.
Step-by-step explanation:
When analyzing the market price of goods and the costs associated with producing them, a crucial concept to understand is marginal cost, which is the additional cost of producing one more unit of a good or service. If a business finds that its marginal cost is $4.00, but the current market price is only $2.00, the firm would theoretically not produce the good because it would result in a loss of $2.00 per unit. The decision to supply goods is primarily based on comparing marginal cost to marginal revenue, which is the additional revenue from selling one more unit.
To understand the dynamics further, consider Figure 9.5 from an economics textbook, where it's shown that at an output level where marginal revenue is greater than marginal cost, producing additional units adds to overall profits. In this instance, the company has an incentive to keep producing. However, when marginal revenue equals marginal cost, the company maximizes its profit. Beyond this point, if marginal cost exceeds marginal revenue, the company should cease production to prevent losses.
In a different scenario, illustrated in Figure 3.23, producers are willing to supply their goods at a lower price but benefit from the higher equilibrium price, gaining what's known as producer surplus, which is the difference between what producers are willing to accept and what they actually receive.