Question

Since you are just starting out and still learning how to farm, your costs are higher than those of your competitors. To make matters worse, economists predict a low price for your crop this year (but prices might be much better next year). You will be producing at a loss. How do you determine whether to produce or not? Draw a graph as part of your answer

Answer 1

Since I am just starting out and still learning how to farm, my cost will be higher than those of my competitors. Economists also predict that this year the price of my product will be lower. Since my cost is high but the price is low hence I will incur a loss this year.

So If I need to decide that whether I should produce or not, I can take the help of the cost and revenue curves graph for this, it is shown as -

The graph shows different cost curve Average variable cost (AVC) cirve, Average Total cost curve (ATC) Marginal Cost curve (MC) and the Price line or the Marginal Revenue (MC) curve. The MR and MC curve intersect at point e and the price should be P1 to make maximum profit. But since it is mentioned that price will be low this year. So whether to produce or not depends on the fact that what is the price level. If the price level is up to point P2, than I can afford to produce because at this point I can cover my variable cost bit if the price goes below P2, let say at P, than I can't produce because at this point I can't recover my variable cost also and there is some portion of fixed cost used up and hence I have to shut down the production for this year and if prices rise next year I can start producing again then.

There are two factors which can help me decide that I should produce this year-

• First is that, at this price also if I am able to recover my variable cost, than I should produce.
• Second is that, since I am new so my cost is high bit next year I will use my this years experience to lower down the cost and hence can make profit even at lower prices.