3
Question
Answer the following questions:
i. What are the assumptions of the law of supply?
ii. What are the determinants of supply?
iii. What are the exceptions to the law of supply?
iv. Explain the concept of Total Cost, Average Cost and Marginal Cost.
i. What are the assumptions of the law of supply?
ii. What are the determinants of supply?
iii. What are the exceptions to the law of supply?
iv. Explain the concept of Total Cost, Average Cost and Marginal Cost.
Open in App
Solution
i. The law of supply is based on the following assumptions:
i. The price of inputs, or firm's cost of production, remains the same.
ii. State of technology does not change i.e. there is neither appreciation nor depreciation of the existing technology.
iii. Price of the related goods (such as substitute goods and complementary goods) remains the same.
iv. Government policies remain unchanged.
v. The objective of the firm remains unchanged.
vi. There is no change in the natural factors and there is no advent of any natural calamity such as an earthquake etc.
ii. The following are the determinants supply of a commodity:
i. Price of commodity - Other things remaining constant, at higher prices, the producers prefer to increase their sales by increasing their supply and vice-versa.
ii. Price of related goods - A rise in the prices of substitute goods will lead to a decrease in the supply of other goods and vice-versa. On the other hand, a rise in the price of complementary goods will lead to an increase in the supply of other goods.
iii. Cost of production - If the price of inputs increases, the cost of production also increases, other things remaining the same. An increase in the cost of production decreases the profits of the supplier and, consequently, lesser quantity is supplied at the given price.
iv. State of technology - Other things remaining the same, if the level of available technology appreciates, the per unit cost of production goes down, which implies higher supply of output and vice-versa.
v. Government policy - Other things remaining constant, if the government policies are more stringent and strict such as high rate of tax, the cost of production will rise. The high cost of production will discourage the producer and thereby, supply will decrease.
vi. Goal of firm - If a particular firm aims at maximising its profit, more units of output will be supplied at higher price, which will result in a higher profit. On the other hand, if the firm aims at maximisation of sales, more of the output will be sold at the same price to maximise sales.
vii. Natural factors - Other things remaining the same, in the event of any natural calamity, such as an earthquake, flood etc., the supply of output will fall.
iii. The following are the exceptions to the law of supply.
i. Cash requirement - If the seller wants cash immediately, he may be willing to supply more, even at a lower price violating the law of supply.
ii. Agricultural sector - The law does not apply to the agricultural products, due to high degree of uncertainty attached to them. For example, whatever be the price, the supply of wheat cannot be increased in the short run, in the event of any natural calamity or crop failure.
iii. Expectations about the future - Quantity supplied by a seller depends on the price expected by the seller to prevail in the market. Thus, if a seller expects that the price will fall in the future, he might increase the quantity supplied at a lower price, thus violating the law of demand.
iv. Rare articles- Goods, like artistic goods (such as paintings) have limited availability. Accordingly, they do not follow the law of supply.
iv. Total cost refers to the total cost of production that is incurred by a firm to carry out the production of goods and services. It is the aggregate of expenditure incurred on fixed factors, as well as variable factors. That is,
TC = TFC + TVC
Average cost is defined as the per unit cost of producing output. It is derived by dividing total cost by the quantity of output produced. That is,
Average Cost =
Marginal cost is defined as the additional cost to the total cost, which is incurred for producing one more unit of output. It can be calculated by either of the following two formulas:
a. MCn = TCn – TCn– 1
b.
i. The price of inputs, or firm's cost of production, remains the same.
ii. State of technology does not change i.e. there is neither appreciation nor depreciation of the existing technology.
iii. Price of the related goods (such as substitute goods and complementary goods) remains the same.
iv. Government policies remain unchanged.
v. The objective of the firm remains unchanged.
vi. There is no change in the natural factors and there is no advent of any natural calamity such as an earthquake etc.
ii. The following are the determinants supply of a commodity:
i. Price of commodity - Other things remaining constant, at higher prices, the producers prefer to increase their sales by increasing their supply and vice-versa.
ii. Price of related goods - A rise in the prices of substitute goods will lead to a decrease in the supply of other goods and vice-versa. On the other hand, a rise in the price of complementary goods will lead to an increase in the supply of other goods.
iii. Cost of production - If the price of inputs increases, the cost of production also increases, other things remaining the same. An increase in the cost of production decreases the profits of the supplier and, consequently, lesser quantity is supplied at the given price.
iv. State of technology - Other things remaining the same, if the level of available technology appreciates, the per unit cost of production goes down, which implies higher supply of output and vice-versa.
v. Government policy - Other things remaining constant, if the government policies are more stringent and strict such as high rate of tax, the cost of production will rise. The high cost of production will discourage the producer and thereby, supply will decrease.
vi. Goal of firm - If a particular firm aims at maximising its profit, more units of output will be supplied at higher price, which will result in a higher profit. On the other hand, if the firm aims at maximisation of sales, more of the output will be sold at the same price to maximise sales.
vii. Natural factors - Other things remaining the same, in the event of any natural calamity, such as an earthquake, flood etc., the supply of output will fall.
iii. The following are the exceptions to the law of supply.
i. Cash requirement - If the seller wants cash immediately, he may be willing to supply more, even at a lower price violating the law of supply.
ii. Agricultural sector - The law does not apply to the agricultural products, due to high degree of uncertainty attached to them. For example, whatever be the price, the supply of wheat cannot be increased in the short run, in the event of any natural calamity or crop failure.
iii. Expectations about the future - Quantity supplied by a seller depends on the price expected by the seller to prevail in the market. Thus, if a seller expects that the price will fall in the future, he might increase the quantity supplied at a lower price, thus violating the law of demand.
iv. Rare articles- Goods, like artistic goods (such as paintings) have limited availability. Accordingly, they do not follow the law of supply.
iv. Total cost refers to the total cost of production that is incurred by a firm to carry out the production of goods and services. It is the aggregate of expenditure incurred on fixed factors, as well as variable factors. That is,
TC = TFC + TVC
Average cost is defined as the per unit cost of producing output. It is derived by dividing total cost by the quantity of output produced. That is,
Average Cost =
Marginal cost is defined as the additional cost to the total cost, which is incurred for producing one more unit of output. It can be calculated by either of the following two formulas:
a. MCn = TCn – TCn– 1
b.
Suggest Corrections
0
Similar questions