Question

1 -If you were running a business, what would the "supply" of your firm mean to you?

2 2. Why does marginal cost such as strong influence on the supply response of a firm?

  3. What things determine the price elasticity of supply of an illegal good?

  4. What is price discrimination? What is meant by reverse price discrimination?

Answer 1

1. Supply of the firm means the quantity produced by the firm with respect to change in price level. As price increases, quantity supplied increases. Hence, supply curve of the firm is upward sloping.

2. Supply curve of a firm is the upward sloping portion of the marginal cost above the average variable cost curve. As MC increases supply curve shifts upwards. Hence, there is a direct relation between MC and supply curve of the firm.

3. Price elasticity of supply for an illegal good is positive. This is because as price increases , change in quantity supplied increases. The factors which determine the quantity supplied for an illegal good is the number of people associated with its production, level of corruption in the society, channel of the illegal market etc.

4. Price discrimination refers to the situation when a same producer or monopolist charges different prices for similar or slightly differentiated goods to different consumers based on various classification like age, sex, geographical location, quantity of units purchased etc.Example of price discrimination is a producers charges less from a wholesale dealer for large units of the product purchased than from a retailer who purchases less amount of units.

Reverse price discrimination refers to the situation where the consumers are charged same price for similar (or slightly differentiated ) goods. In this case, the producer faces different cost conditions in different sub-markets. Example of reverse price discrimination are airlines fare etc.