Demand and Supply II Ncert/Microeconomics

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                                                 SUPPLY

 A firm, we maintain, is a ruthless profit maximiser. So, the amount that a firm produces and sells in the market is that which maximises its profit. A perfectly competitive market has the following defining features: 1. The market consists of a large number of buyers and sellers 2. Each firm produces and sells a homogenous product. i.e., the product of one firm cannot be differentiated from the product of any other firm. 3. Entry into the market as well as exit from the market are free for firms. 4. Information is perfect. The existence of a large number of buyers and sellers means that each individual buyer and seller is very small compared to the size of the market. These features result in the single most distinguishing characteristic of perfect competition: price taking behaviour. A firm earns revenue by selling the good that it produces in the market. Let the market price of a unit of the good be p. Let q be the quantity of the good produced, and therefore sold, by the firm at price p. Then, total revenue (TR) of the firm is defined as the market price of the good (p) multiplied by the firm’s output (q). Hence, TR = p × q The average revenue ( AR ) of a firm is defined as total revenue per unit of output. Recall that if a firm’s output is q and the market price is p, then TR equals p × q. Hence AR = TR/ q = p *q /q = pThe marginal revenue (MR) of a firm is defined as the increase in total revenue for a unit increase in the firm’s output. Total revenue from the sale of 2 boxes of candles is Rs.20. Total revenue from the sale of 3 boxes of candles is Rs.30. Marginal Revenue (MR) = Change in total revenue/ Change in quantity = 30-20/3-2 =10 A firm produces and sells a certain amount of a good. The firm’s profit, denoted by π 1 , is defined to be the difference between its total revenue (TR) and its total cost of production (TC ). In other words π = TR – TC For profits to be maximum, three conditions must hold at q0 : 1. The price, p, must equal MC 2. Marginal cost must be non-decreasing at q0 3. For the firm to continue to produce, in the short run, price must be greater than the average variable cost (p > AVC); in the long run, price must be greater than the average cost (p > AC). A firm’s ‘supply’ is the quantity that it chooses to sell at a given price, given technology, and given the prices of factors of production. Describing the quantities sold by a firm at various prices, technology and prices of factors remaining unchanged, is called a supply schedule. The supply curve of a firm shows the levels of output (plotted on the x-axis) that the firm chooses to produce corresponding to different values of the market price (plotted on the y-axis), again keeping technology and prices of factors of production unchanged.

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