Question

This week's 'optional' discussion is something of a logical puzzle. Answer each of the following questions, leading especially to the last. Try to make you answer as easily understandable as possible--and, if you like, reflect on why this might be important to economic theory more generally.

1. The supply curve (or schedule) simply tells us the functional relationship between what two variables?
2. What is the law of supply?
3. The marginal cost curve tells us the functional relationship between what two variables?
4. Given that profit maximizing firms produce a quantity (Q) where MC = MR, and given that under perfect competition MR = P, what is the relationship between supply and marginal costs?
5. What explains the law of supply?

Answer 1

• The supply curve tells us the functional relationship between the supply price (p) and the quantity supplied (q) of a commodity .
• Other things remaining constant , if the price of a good increases , the quantity supplied will also increase. This is known as the Law of Supply . Hence , it depicts a positive relationship between supply price and quantity supplied. That's why supply curve is positively sloped .
• The marginal cost curve portrays the rate of increase of the total cost curve . Marginal cost is the slope of the total cost . It shows how much total cost is increasing if one additional unit is produced. Therefore , it shows the functional relationship between increase in total cost and production of one additional unit .
• Supply curve describes how much quantity will be produced at each price ceteris paribus . Marginal cost curve also tells us essentially the same thing. Under perfect competition, the portion of marginal cost curve that lies above the minimum point of average variable cost curve is the firm's supply curve . For a profit maximizing monopolist, however, there is no supply curve as he is the sole decision maker of quantity produced and sold in the market at a price rate fixed by him .
• The law of supply is explained by the functional relationship between quantity supplied at each supply price . There is a positive and direct relationship between these 2 variables.