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=) condition., , Condition - 3, “According to the third condition in the short nun price must be greater than the average variable cost (P > AVC) and, , in the long run price must be greater than the average cost (P > AC), , Case : 1 In Shortrun (P > AVC) Y SMC, , ee, ns, AVC, shown in the above diagram a profit maximizing firm produces zero, , output in the shortrun when the market price is P which is less than \ B, the minimum of its average variable cost (AVC). So the firm will a A, choose not to produce at all and exit from the market., , A profit maximizing firm, in the short run will not produce at an, output level wherein the market price is lower than the AVC. As, , , , m, , Price and Costs, , , , ~, , , , , , , , 4, Output, , °, , Case 2: In longrun (P > AC), , Ass shown in the diagram A profit maximizing firm produces zero output, in the long run when the market price is P which is less than the, minimum of its longrun average cost (LRAC). If the firm output level is, qi the firm’s total cost exceeds its revenue by an amount equal to the area, of rectangle PEBA. Hence a firm that shuts down production has a profit, , LRAC, , m, , Price and Costs, , of zero., x, , , , The Profit Maximization Problem Graphical, , . Output, Representation, , In short run the given market price of a firm is P. The total Y smc, revenue of the firm at qo is the area of rectangle OPAqo :, and total cost at qo is the area of rectangle OEBqp. So at qo, the firm earns a profit equal to the area of rectangle, EPAB., , , , SAC, , Price and Costs, , , , @=TR-TC, = OPAq, - OEBq,, '=EPAB, , , , , , , , , , —>X

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Qo, UPply Curve of a Firm site given price of, Dn, jeotnol 0B *, , , , , , , , , , , , Supply, “A firm's su, i oe at giver, factors of pr A is the quantity that it chooses to sell at a give? prices, 'Uction, sining, mm, Supply Schedule 4 prices of factors, A lable describing th . _—qectnoloey 2, Unchanged is ¢ in & the quantities sold by a firm at various pricesSh S Called a supply schedule. ., Ort Run aaaiecite™, Supply Curve of a Firm sin V abl, () Short run is a period ¢, jth the change aifferent values, Supply ° 4 Period in which the changes in production can be made W! responding to di, tisha roduce ©, Of the Market es Shows the levels of output that the firm chooses to p) et rani, le, Short run su, average ¥ al, ant, Profi PPIY curve of a firm is based on short run marginal cost curve (SMC), it maximizi nt, (1) Wh 298 output level of a firm is possible under to conditions. They are:, e. get e, (0) He ‘n market price ig Sreater than or equal to the minimum AVC (P= AVC), hen the ma _,, a © market price is less than the minimum AVC. (P < AVC) tail sate help of, ° Deere ,, ‘ase Ai Price is 8reater than or equal to the minimum AVC: This case can be explaii, following diagram, owe, In the above di __ Price,, pri © clagram OX axis represents output level and on OY axis costs, ice ! /, awh and cost. If the market price is P, which exceeds the minimum SAC, 4 We Start out by equating P, with SMC on the rising part of the MC cae, Curve this leads to the output level qy. Here the AVC at q; doesnot exceed p \, the market price Py. y Ae =, P2, a Output, , At q: all the profit maximization conditions are fulfilled. Hence when, oO, , market price P, the firm’s output level in the short run is equal at q)., Case 2: Price is less than the minimum AVC: If the market price is P, which is less than the minimum AVC. We, , have argued that if a profit maximizing firm produces a positive output in the short run the market price P, must be, greater than or equal to the AVC at that output Jevel. In otherwords, it cannot be the case that the firm supplies a, , Positive output. So if the market price is P2 the firm produces zero output., The above two gas s.conclude that A firm’s short run supply curve is the rising part of the SMC curve from and, , above the minimum AVC together with zero output for all prices strictly less than the minimum AVC., , Longrun Supply Curve of a Firm, Longrun is a period in which changes in production is possible by changing all inputs., , In the Jongrun all factors of productions are variable and hence all costs are become variable costs., ‘rm's profit maximization is possible only when the market price is less than or equal to.longrun, , , , Hence the fi, , average cost (P2 LRAC)., Spe a

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55, , Jeevith Publications, , The derivation of longrun sy,, , PPly cury, r, Case 1: Price is Breater than © can be possible under 2 cases., , Or equal to the min;, Ciin2¥ Paice | ¢ minimum LRAC [P=LRAC], , , , , , , , , , , , costs, LRAC, , P,, , P:, o a Output, , Case 1: Price is greater than or equal to minimum LRAC (P > LRAC), , As mentioned in the diagram suppose the market price is P}, which exceeds the minimum LRAC, upon equating P,, with LRMC on the rising part of the LRMC curve, we obtain output level q;. LRAC at qy ‘doesnot exceed the, market price P;. Thus all profit maximization conditions are satisfied at q:. Hence when the market price is P, the, firms supplies in the longrun become an output equal to qi., , Case 2: Price is less than the minimum LRAC (P < LRAC), If the market price is P2 which is less than the minimum LRAC. As profit maximizing firm produces a positive, , output in the longrun only when price is greater than or equal to LRAC (P > LRAC). Hence due to avoid the loss, condition when the market price is P2 which is greater than price the firm produces zero output., , Finally the above two cases conclude that A firm’s longrun supply curve is the rising part of the L RMC curve from, and above the minimum LRAC together with zero output for all prices less than the minimum LRAC.

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-~+w0a,, , rice Elasticity of Supply, , ice elasticity of supply refers to the Tesponsiveness of quantity supplied to changes in the price of the good., , e., Price elasticity of supply, ¢, = Percentage changein quantity supplied, Percentage change in price, , , , , , , , , , , , OR, AQ., Q_ AQ, P|, = x100 Q AP, e Geometric Method, , , , , , (c), , (b), , (a), ice elasticity associated with straight line supply curves. In panel (a) price elasticity (e,) at S is greater than 1, In, el (b), price elasticity (e,) at S is equal to 1. In panel (c), price elasticity (e,) at S is less than 1.