Question

A competitive firm’s short run supply curve is equivalent to the portion of its marginal cost curve which lies above its average variable cost curve. Explain fully why this is the case.

B. Define economic rent. Suppose a competitive firm is able to earn economic profit due to using an especially high-quality and scarce resource. Explain (in words and/or with a graph) how in the long run owners of the scarce resource are able to capture the economic profit from firms.

Answer 1

Solution 2 ( A ) :

A competitive firm’s short run supply curve is equivalent to the portion of its marginal cost curve which lies above its average variable cost curve

In the short run , both fixed and variable factors are included . If a firm wants to change the supply of goods all this can only done by changing in the variable factors . A firm will supply a product up to that price  where  P AVC because at min. AVC a competitive firm faces the shut down situation which shows that this is a point below this , a firm could not produce anything as firm bear fixed cost and faces only loss here.Hence, above portion of MC from min. AVC is called as supply curve of a firm . This indicates a firm always produces and supply from above this price level.

From the fig. ,  Below the OP ₁ price no supply would be done and also this is the shut down point for a firm shown by point A.  It shows that from above the AVC , MC termed to as supply curve of a competitive firm shown by point D , E , F point in fig.2 and also supply curve has upward sloping .

Solution : 2 (B )  

Economic Rent shows the money paid or made in excess of the expected amount of scared factors . In simple words , the surplus earning ( excess amount ) of a factor due to its scarcity is called as economic rent . It also shows that supply of scared factor is less than its demand , which generates the situation where an owner of scared factor can get excess earnings .

Economic Rent = Actual Earnings -- Transfer Earnings ( payments to input )

Suppose a competitive firm is able to earn economic profit due to using an especially high-quality and scarce resource. Explain (in words and/or with a graph) how in the long run owners of the scarce resource are able to capture the economic profit from firms.

In the long run new firms are attracted to the industry by positive economic profit . In the long run two type of efficiency face by the firm i.e., Productive efficiency and Allocative efficiency . Productive efficiency means no alternative to produce the given level of output and Allocative efficiency means allocation of resources which are most valued by the society .

In the long run owners of the scarce resource are able to capture the economic profit from firms which indicates the situation of  P > MC implies that when cost of marginal production is less than its actual price so, an owner should continue its production till gets economic profits from firms . As resource are scare so, an owner is in condition where he can charge high prices for this and allocate the scared resource according to his economic profit.