Q. 125.0( 1 Vote )

Examine the effec

Answer :

a. Fall in price of the commodity will decrease the quantity supplied of the commodity. This will be moved along the same supply curve. In case of a decrease in quantity supplied the supply curve will contract. In case of an increase in supply the supply curve will expand. The movement along same supply curve is known contraction and expansion in the supply curve.


In the supply Curve SS which is positively sloped from right to left. The y-axis is measured with price and x-axis is measured with quantity. When the price of good falls from P to P1, the point on supply curve shifted from A to B and quantity decreased from Q to Q1.



b) The rise in the price of the factor input of the commodity will increase the price of the commodity. A rise in the cost of production will shift the supply curve to the left. This shift towards lest indicates the less amount of quantity of output will be supplied at a given price.



The shift in supply to the left is because to maintain the price level by reducing the quantity supplied of the commodity. To supply at the same price the supply curve is shifted to the left.


OR


Producer’s equilibrium is the condition where the producer maximizes the profit of the firm. The firm maximizes profit by maximizing the sales of the output by raising the prices or by maintaining equilibrium price. Profit refers to the excess of revenue after meeting the cost of the firm. The firm profit is denoted as π.


Profit = Total revenue – Total Cost.


= TR – TC


The condition of the producer's equilibrium is


• MR=MC


• MC must be rising.


This is the two essential conditions for the producer to be in equilibrium. There will be two points where MC is equal to MR. but the equilibrium will be at the point where the MC is rising. This ensures that both conditions are necessary for the producer to be in equilibrium.



The above diagram shows the producer's equilibrium is obtained at the price level P and quantity Q. PC is the economic profit which is attained by the producer at equilibrium in the short run. MR is a straight line parallel to the x-axis and MC is the U-shaped curve. ATC is drawn further to determine the profit of the firm. Therefore equilibrium is obtained where MC=MR and MC are rising.


The producer can sell more by lowering the price of the commodity. When the price is being lowered by the producer then the demand for the commodity increases because demand is negatively related to price. When the price raises the demand decreases and when the price falls the demand rises. This law of demand reflects that a producer can sell more by reducing the price of the commodity.


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