Production Decisions

Question 1

What is the Short Run Supply Curve?

Answer 1

SRSC= MC when MC>AVC

Question 2

What is the optimal production level in the short run?

Answer 2

This is when P=MC

Question 3

When is it worth producing in the short run?

Answer 3

When P>AVC

Question 4

When is it worth producing in the long run?

Answer 4

When P>ATC

Question 5

Except price, what influences the supply curve?

Answer 5

-Technology: better technology increases quantity supplied at every price level (A increases)
-Number of firm: More firms means more supply overall
-Price of substitutes: A higher price is needed if more money can be made selling an alternative
-Price of complements: A lower price can be accepted if revenues from a co-product increase
-Price of inputs: Higher costs means a higher price is needed to achieve normal profits
-Future prices: If the price of a product is expected to increase then supply will increase

Question 6

What affects the price elasticity of supply?

Answer 6

-Are firms operating at full capacity?: It is easier to expand if the industry is operating at a lower capacity
-Barriers to entry
-Timescale
Supply will always be more elastic in the long run than in the short run

Question 7

What is the producer surplus?

Answer 7

This is the area bounded by the equilibrium price and the supply curve

Question 8

What are the first and second order conditions for profit maximisation?

Answer 8

-d(PQ-TC)/dQ=0
-D^2(PQ-TC)/DQ^2<0
Profits are maximised when P=MC

Question 9

What are the two main cost conditions?

Answer 9

-Firms are price takers
-Firms are price setters