Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What characteristic of a firm's supply curve in the short run is significant?

1. It follows the pattern of the demand curve

2. It is always upward sloping

3. It reflects the marginal cost only above average variable cost

4. It remains constant despite changes in price

The correct answer is: It reflects the marginal cost only above average variable cost

In the context of a firm's supply curve in the short run, the significant characteristic is that it reflects the marginal cost only above average variable cost. This is because, in the short run, a firm will only produce and supply goods when the price meets or exceeds the average variable cost. Below this point, making production decisions could result in losses that exceed fixed costs in the short term, making it unprofitable for the firm to continue operating. The supply curve illustrates the relationship between price and quantity supplied, and in the short run, it typically becomes elastic as firms respond to price changes based on their varying levels of output and production capability. Therefore, the firm will only supply quantities where the price is high enough to cover the variable costs associated with additional production. This ensures that the firm can at least cover its variable costs, thereby allowing it to operate, even if it may not cover total costs, including fixed costs. This characteristic is essential as it helps understand how firms make decisions based on cost structures and market prices, particularly in the short run where adjustments to supply are limited.