Final answer:
If the price drops below average variable cost, the firm experiences a loss by continuing production. The firm's marginal cost curve serves as its supply curve for prices at or above average variable cost. If the price is lower, the firm minimizes its losses by shutting down.
Step-by-step explanation:
If the price drops below average variable cost, the firm will have a loss if it shuts down and produces no output. In terms of supply curves, yes, the firm's marginal cost curve is its supply curve only for prices at or above its average variable cost. When the price is below the average variable cost, the firm is better off shutting down in the short run, because it would lose more money by continuing to produce than it does by shutting down. Shutting down in this scenario minimizes the loss to the total fixed costs, whereas continuing to produce would add variable costs to the loss.
In short, for a firm to continue operating in the short run, the price it receives must at least cover its average variable costs. If prices fall below this level, then the firm faces a decision to either continue operating at a loss or to shut down and incur losses equal to its fixed costs.