Producer Behaviour and Supply
What the domain tests
Producer Behaviour and Supply tests production in the short and long run, the law of variable proportions, returns to scale, cost and revenue curves, and the law of supply. You must link marginal cost to supply and distinguish movements from shifts.
Core rules
- Short run vs long run: in the short run at least one factor is fixed; in the long run all factors are variable.
- Law of variable proportions: with one variable factor, marginal product first rises, then falls, and can become negative; this explains diminishing returns.
- Costs: TC = TFC + TVC; AC = TC/Q; MC = ΔTC/ΔQ. MC cuts AC at AC's minimum. In the long run all costs are variable.
- Revenue: TR = P × Q; MR = ΔTR/ΔQ. Under perfect competition P = AR = MR.
- Supply: direct relationship between price and quantity supplied, other things equal. Input prices, technology, taxes, and subsidies shift supply.
Worked example
At Q = 10, total cost is ₹500, so AC = ₹50. At Q = 11, total cost is ₹560, so MC = ₹60 and AC = ₹50.91. Since MC exceeds AC, average cost rises. If a per-unit tax is imposed, the supply curve shifts left or up by the tax amount at every quantity; this is a shift, not a movement along the curve.
Traps that cost marks
Do not confuse diminishing returns to a variable factor with decreasing returns to scale. Do not say fixed costs exist in the long run. Do not treat a price change as a supply shift. Remember that MC depends on the change in total cost, not on average cost. A subsidy shifts supply right or down.