Producer Behaviour and Supply
What this domain tests
This domain covers production in the short and long run, the law of variable proportions, cost and revenue curves, and the law of supply with elasticity of supply.
Core rules
- Short run and long run: in the short run at least one factor is fixed; in the long run all factors can vary.
- Law of variable proportions: with one variable factor, marginal product first rises, then falls, and can become negative.
- Costs: TC = TFC + TVC; AFC = TFC ÷ Q; AVC = TVC ÷ Q; ATC = TC ÷ Q. MC is the addition to total cost from one more unit.
- Revenue: TR = P × Q; MR is the addition to TR from one more unit.
- Law of supply: other things equal, quantity supplied rises with price. A change in price causes movement along the supply curve; technology, input prices or taxes shift it.
Worked example
At 5 units, fixed cost is ₹100 and total variable cost is ₹150. TC = ₹250, AFC = ₹20, AVC = ₹30 and ATC = ₹50. If price is ₹50, TR = ₹250, so economic profit is zero. The firm earns normal profit because all costs, including implicit costs, are covered.
Traps that cost marks
Do not say fixed cost changes with output in the short run. MC is not affected by fixed cost. Do not confuse a shift of supply with a movement along supply. Remember that normal profit is part of cost in economic analysis, and that a firm may continue in the short run while covering variable cost even if it makes a loss.