3.2: Firm's Supply SR

Question 1

Draw diagram and explain why firms produce where they do in a PCM?

Answer 1

Now (see notes)

Question 2

2 reason a firm may operate at a loss in a PCM?

Answer 2

• May think there will be an increase in P or fall in AC in near future
• May be large shutting down/starting up costs

Question 3

Difference between shutting down and exiting a market?

Answer 3

At shut down, firm produces 0 output but still incurs fixed costs; if a firm exits they can sell their fixed capital and stop paying fixed costs

Question 4

Firm’s short run supply curve in a PCM?

Answer 4

The portion of its MC curve above the minimum of the AVC curve

Question 5

Why is supply UWS for a firm in a PCM?

Answer 5

Supply=MC curve above AVC

MC curve is UWS since in SR MC rises due to diminishing MP(L) since K is fixed

Question 6

What happens to the MC curve when input prices rise?

Answer 6

Shifts up (and vice versa)

Question 7

What is market supply equal to in SR)

Answer 7

Sum of output of all firms (sum of all individual supply curves)

Question 8

Why might industry supply in a PCM be unresponsive to a change in price?

Answer 8

Increase price -> increase production -> increase demand for inputs -> shift up of MC curves -> fall in firm’s output levels (see diagram in notes and learn it!)

Question 9

Draw diagram showing producer surplus for a firm in PCM?

Answer 9

See notes
Happens since MR>MC on all but the last unit of output sold
The green represents TVC (sum of MC)