ответьте на вопросы по тексту , нужно Theory of Supply.
1. What is the principal assumption of the supply theory?
2. What is the difference between profit and revenue?
3. What is included in costs of production?
4. How do firms get maximum profits?
5. When are profits the highest?
6. When should firms close down?
7. What is the relationship between marginal revenue, marginal cost and output?
8. What is market supply? What is market supply important for?
Theory of Supply
The theory of supply is the theory of how much output firms choose to Produce. The principal assumption of the supply theory is that the producer W l ll maintain the level of output at which he maximizes his profit.
Profit can be defined in terms of revenue and costs. Revenue is what the firm earns by selling goods or services in a given period such as a year. Costs are the expenses which are necessary for producing and selling goods or services during the period. Profit is the revenue from selling the output minus the costs of inputs used.
Costs should include opportunity costs of all resources used in production. Opportunity cost of a commodity is the amount an input can obtain in its best alternative use (best use elsewhere). In particular, costs include the owner's time and effort in running a business. Costs also include the opportunity cost of the financial capital used in the firm
Aiming to get higher profits, firms obtain each output level as cheaply as possible. Firms choose the optimal output level to receive the highest profits. This decision can be described in terms of marginal cost and marginal revenue.
Marginal cost is the increase in total cost when one additional unit of output is produced
Marginal revenue is the corresponding change in total revenue from selling one more unit of output.
As the individual firm has to be a price-taker1 , each firm's marginal revenue is the prevailing market price. Profits are the highest at the output level at which marginal cost is equal to marginal revenue, that is, to the market price of the output. If profits are negative at this output level, the firm should close down.
An increase in marginal cost reduces output. A rise in marginal revenue increases output. The optimal quantity also depends on the output prices as well as on the input costs. Of course, the optimal supply quantity is affected by such noneconomic factors as technology, environment, etc
Making economic forecasts, it is necessary to know the effect of a price change on the whole output rather than the supply of individual firms.
Market supply is defined in terms of the alternative quantities of a commodity all firms in a particular market offer as price varies and as all other factors are assumed constant.
2. Profit and revenue are related but different concepts. Revenue is the amount of money earned by selling goods or services in a given period, usually a year. Profit, on the other hand, is the revenue obtained from selling the output minus the costs of inputs used in the production process.
3. The costs of production include all the expenses necessary for producing and selling goods or services during a specific period. This includes the costs of inputs such as raw materials, labor, and other resources used in the production process. It also includes the opportunity cost of these resources, which is the amount they could have earned in their best alternative use.
4. Firms aim to maximize their profits by obtaining each output level as cheaply as possible. This means that they try to minimize their costs of production while maximizing their revenue. They choose the optimal output level at which they can achieve the highest profits.
5. Profits are the highest at the output level where marginal cost is equal to marginal revenue. Marginal cost is the increase in total cost when one additional unit of output is produced, while marginal revenue is the corresponding change in total revenue from selling one more unit of output. When profits are negative at this output level, it means that the firm is not covering its costs and should consider closing down.
6. Firms should close down when they are unable to cover their costs of production and are experiencing negative profits at the current output level. This could be due to various reasons such as high costs, low demand, or competition. In such cases, it may be more profitable for the firm to cease its operations.
7. The relationship between marginal revenue, marginal cost, and output is crucial in determining the optimal quantity of goods or services to produce. If marginal revenue is greater than marginal cost, it means that producing an additional unit of output will bring in more revenue than it costs. In this case, the firm should increase its output. However, if marginal cost is greater than marginal revenue, it means that producing an additional unit of output will cost more than the revenue it generates. In this case, the firm should decrease its output.
8. Market supply refers to the total quantity of a commodity that all firms in a particular market offer as the price varies, assuming all other factors remain constant. It is important to understand market supply because it helps in analyzing the overall quantity of a commodity available in the market and how it responds to changes in price. By understanding market supply, economists can make better economic forecasts and analyze the impact of price changes on the entire output rather than just individual firms.