Final answer:
The basic trade-off for a supplier regarding production capacity revolves around balancing cost and revenue to ensure profitability while satisfying market demand. This involves strategic decisions about production levels and pricing to achieve the right equilibrium.
Step-by-step explanation:
The basic trade-off to be considered by the supplier with production capacity is between cost and revenue. This decision is crucial as suppliers need to determine how much to offer for sale at various prices.
The cost involves the amount a firm pays for producing its products, which includes converting inputs to outputs, where each input bears a cost.
On the other hand, revenue is a function of the demand for the firm's products, calculated as price multiplied by quantity. Suppliers have to balance these two to ensure profitability while meeting the market demand.
Furthermore, equilibrium price and quantity are identified using a four-step process, involving graphing demand and supply curves and analyzing their adjustments based on shifts in demand or supply.
Understanding these concepts thoroughly helps suppliers make informed decisions about their production levels and pricing strategies in order to maximize profits