Supply

Question 1

What is the Concept of a Firm,Industry and Market?

Answer 1

A firm is a single business enterprise, assumed to have identifiable cost structure and produce a single product. However, most farms are more complex than this.
Firm is relatively small, an industry consists of
many firms producing the same product. In
economics these concepts are further refined,
i.e. a competitive firm in a competitive industry.
The firms are all identical in cost structure (i.e. technologies used) and their profit maximising objective.
The products produced are identical and sell at the same price. No firm is large enough to influence price or volume sold in the market, ceteris paribus.

Question 2

What is Profit Maximisation?

Answer 2

There are two approaches for determining the profit-maximising level of output:
Total revenue (TR) and total cost (TC) approach Marginal revenue (MR) and marginal cost (MC) Approach.
The MR and MC approach is preferable one, as it focuses on the changes in costs and revenues.

Question 3

What is the Total Revenue - Total Cost Approach?

Answer 3

Profit = Total Revenue (TR) - Total Costs (TC)
For a price taker,
TR = Quantity (Q) x Price (P) per unit of output. P is the selling price (in $/Kg).
TC = Quantity (Q) x Cost (C) per unit of output. C is the cost incurred due to the inputs and resources employed (in $/Kg).

Question 4

What is the Marginal revenue - Marginal Cost Approach?

Answer 4

This approach compares the amounts that each additional unit of output adds to the total revenue and the total cost.
Average Revenue (AR) = TR/Q Marginal Revenue =TR/ Q
If a firm sells all its produce at the same price, as a price taker, then MR = AR = Price (P)
Profit will be maximised when MC = MR, or MC = P, or MC = AR (because MR = P = AR)

Question 5

What is the Break Even Point?

Answer 5

Level of output at which TR = TC

or, AR = ATC, where AR is also equal to P and MR

Question 6

What is the Shut Down Point?

Answer 6

Level of output at which AR = AVC, where AR is also equal to P and MR (note AC is the ATC).

Question 7

What is the Supply Curve of the firm and Industry?

Answer 7

The supply curve of a firm can be its marginal cost curve above minimum of the average variable cost.
The firm will respond to changes in price and alter production so that MC = P to maximise profit.
The industry supply curve is the summation of the supply curves of all the firms. It measures the aggregated willingness of all the firms in the industry to supply the product at a particular price.

Question 8

What is the Linear Supply Curve and Supply of Elasticity?

Answer 8

Elasticity of supply is a ratio of the percentage change in quantity supplied (produced) in response to the percentage change in price.
Formula for elasticity of supply: Es = %Q/%P Es = [(Q1-Q2)/(Q1+Q2)]/[(P1-P2)/(P1+P2)]
If a linear supply curve intersects with the horizontal axis its elasticity will be less than 1 ( + 1.0) -
A vertical supply curve has zero price elasticity (i.e. quantity supplied is unresponsive to price), and a horizontal supply curve has infinite price elasticity (i.e. large quantity response to zero price change)

Question 9

What is meant by Short Run?

Answer 9

In short-run no supply response is possible and therefore the supply curve is shown as a vertical line

Question 10

What is meant by Medium Run?

Answer 10

As we lengthen the time for adjustment (medium- run) increasing amounts of previously fixed factors can be varied and the supply elasticity will increase

Question 11

What is meant by Long Run?

Answer 11

In long run complete adjustment to price change has taken place and elasticity of supply will be at
its highest

Question 12

What is the Supply Response In Agriculture?

Answer 12

Supply is influenced by technological, biological, economic, social and institutional factors.
Elasticity of supply in agriculture tends to be low in short-run because of the following reasons:
 Slow pace of adjustment due to social factors.

Question 13

What are Factors That Shift The Supply Curve?

Answer 13

• Change in the variable costs of production (short run)
• Change in the fixed costs of production (long run)
• Change in the opportunity costs
• Technological change
• Change in environmental factors
• Factors which affect adjustment time

Question 14

What is Elasticity Of Supply?

Answer 14

Measure of the change in quantity supplied in response to changes in market price (own price of the product)

Question 15

What is Cross - Price Elasticity?

Answer 15

measures the changes in quantity supplied of one product to the changes in the price of a different product (either substitute or complement).
Signs: + for complements; - for substitutes

Question 16

What are Abnormal Supply Responses?

Answer 16

Two types of abnormal supply responses that appear in the literature:
“Peasant response” - small and/or poor farmers (mainly in developing countries)
“Backward bending supply response”
A typical example is the labour market supply
(refer Modules for explanation)
Increase in supply in response to falling prices, and desire to maintain income.
Higher levels of output likely to further depress the prices.
Indicates no other sources of income available and ‘peasant’ has fixed commitments.

Question 17

Key Terms

Answer 17

•Firm, industry and market
•Profit maximisation
•Total Revenue - Total Cost approach •Marginal Revenue - Marginal Cost approach •Profit (economic profit/pure profit) •Break-Even point
•Shut-down point
•Supply curve of the firm and industry •Linear supply curves
Supply Elasticity
•Perfect elastic supply curve
•Imperfect elastic supply curve
•Effect of time on supply (supply elasticity) •Supply response in agriculture (reasons?)
•Examples of supply shifters in agriculture?
•Elasticity of supply (formula)
•Cross-price elasticity
•Complements (sign +) (examples?) •Substitutes (sign -) (examples?)
•Abnormal supply curves