Question

DIFFERENT ANSWERS THAN THE POSTED ONE PLEASE!

This week's discussion opportunity is something of a logical puzzle. Answer each of the following questions, leading especially to the last. Try to make you answer as easily understandable as possible--and, if you like, reflect on why this might be important to economic theory more generally.

1. The supply curve (or schedule) simply tells us the functional relationship between what two variables?
2. What is the law of supply?
3. The marginal cost curve tells us the functional relationship between what two variables?
4. Given that profit maximizing firms produce a quantity (Q) where MC = MR, and given that under perfect competition MR = P, what is the relationship between supply and marginal costs?
5. What explains the law of supply?

Answer 1

Ans-1 Supply schedule can be defined as a relation or shows functional relationship between the price of goods or services and the number of goods supplied.

Law of supply- The Law of Supply states that when the price of a commodity falls, its supply decreases and when the price of a commodity rises, its supply increases; other things remaining constant. It means there is a positive relationship between supply of a commodity and price of a commodity.

Ans-Marginal cost represents the incremental costs incurred when producing additional units of a good or service.

It shows functional relationship between: Marginal Cost = (Change in Costs) / (Change in Quantity)

Ans- The firm in perfect competition produces at a point where MR=MC, because at this point they earn the maximum profit (producer's equilibrium).

Marginal revenue (MR) is the increase in total revenue resulting from a one-unit increase in output. Since the price is constant in the perfect competition. The increase in total revenue from producing 1 extra unit will equal to the price. Therefore, P= MR in perfect competition.

A supply curve tells us the quantity that will be produced at each price, and that is what the firm's marginal cost curve tells us. The firm's supply curve in the short run is its marginal cost curve for prices above the average variable cost. At prices below average variable cost, the firm's output drops to zero.

Law of supply states that other factors remaining constant, price and quantity supplied of a good are directly related to each other. In other words, when the price paid by buyers for a good rises, then suppliers increase the supply of that good in the market.