Final answer:
When marginal cost rises above average variable cost, it causes the average variable cost to increase as well. This is due to diminishing marginal productivity, as illustrated with the example of hiring additional barbers. Consequently, a firm's individual supply curve shifts upwards as they would require a higher market price to supply the same amount of output.
Step-by-step explanation:
When marginal cost is rising, it eventually surpasses the average variable cost (AVC). Consider an example involving barbers: Initially, each additional barber hired significantly increases output, demonstrating high marginal productivity. However, due to diminishing marginal productivity, as more barbers are employed, each contributes less and less to overall output. This decrease in marginal productivity drives up the marginal cost after a certain point.
As marginal cost is the cost of producing one more unit, when it rises, it indicates that the cost to produce each additional unit is increasing. Over time, as more units are produced and marginal costs continue to rise, the average variable cost, which is the average of all variable costs associated with production, will also begin to increase. This happens because the marginal cost influences the average variable cost when the former is higher than the latter.
If, in a business scenario, the marginal cost increases above the average variable cost, it results in a shift of the firm's individual supply curve. As a firm will supply where price equals marginal cost, if marginal costs go up, the supply curve will shift upwards, indicating that the firm would only supply at a higher market price.