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Theory of supply The is the theory of how much output firms choose to
Produce. Principal assumption of The the supply theory is that the producer
Wlll maintain the level of output at which he maximizes his profit.
Profit can be defined in terms of revenue and costs. Is what the Revenue
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). Particular In, costs include the
owner's time and effort in running a business. Also include the Costs 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 revenue from selling total
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. Are the highest Profits at the output level at which
marginal cost is equal to marginal revenue, that is, to the market price of the
output. Profits are negative If at this output level, the firm should address close e-down.
An increase in marginal cost reduces output. Marginal rise in A revenue
increases output. Also optimal quantity The 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, etc2.
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 in terms of defined the alternative quantities of a commodity
all firms in a particular market offer as
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