Answer to Question #276466 in Microeconomics for lisiochsner

Question

The short run supply curve of a company selling its goods on a competitive

market: explain how imposing some assumptions on the firm’s objectives

and on the costs’ behaviour economists derive a relationship between the

price level and the quantity of goods that a firm supplies.

Answer 1

For economist to determine amount of output to suppy the firms objective is to maximize profits reliant to two conditions that are demand of a firms product by consumer and the cost of production of the firm. Price is determined by consumer's demands at which the firm sells its products.

The production cost is determined by the technology used by the firm.

Where the firm considers supplying level of output where its marginal cost is same as the marginal revenue, the firms maximizes its profits and the firm won't shut down in the long run. The firm is able to operate as it can cover its variable costs and as for the remaining revenue us it to cover the fixed costs. If the marginal cost is higher than marginal revenue the firm loses money and thus must reduce its output as well and this leads to a shutdown. 

According to the law of supply the supply of a product increases as the market price increases. When the marginal cost curve is above its variable cost curve there will be an increase in the supply quantity of goods. While if the marginal revenue curve that is market price, lies below that average variable cost then there is reduced supply of the goods.

However some firms may decide to supply more despite the prices that don't ensure profit maximization reason being to gain and extensive market and so as to be major players in the market. 

In some instances suppliers tend to reduce prices of products if consumers buy in larger quantities. Because it is possible to approximate non linear cost function with linear function economist rely on the assumption that cost functions are linear. 

At times costs can be fixed over a range of goods but rise by a distinct amount or as the level of output increases thus showing cost behaviour. This tends to happen when the firm buys and input in distinct amounts but then only uses some fractional quantities.