Mbeya cement company which has arising short run marginal cost curve is currently operating at loss. Mbeya cement company chief economist says that if the price rises a little the output should not be increased because if it's marginal cost will rise and the company will end up with a big loss on higher volume. Explain with graphs

The graph below illustrates the situation of Mbeya Cement Company. The horizontal axis represents the quantity of output and the vertical axis represents the price. The blue line represents the demand curve and the red line represents the marginal cost curve.

The demand curve shows that the price of the cement is inversely related to the quantity demanded. As the quantity of cement increases, the price decreases.

The marginal cost curve shows that the cost of producing one additional unit of cement increases as the quantity of cement produced increases. This is because of the fixed costs associated with producing cement, such as the cost of raw materials, labor, and energy.

The company is currently operating at a loss because the price of the cement is lower than the marginal cost of producing it. If the price of the cement were to increase, the company would still be operating at a loss because the marginal cost of producing the cement would still be higher than the price. Therefore, increasing the price would not increase the output and the company would still be operating at a loss.

To explain the situation visually, we can use a graph that shows the short-run marginal cost (MC) curve and the marginal revenue (MR) curve for Mbeya cement company. Let's assume the output is measured on the horizontal axis (Q) and the cost and revenue are measured on the vertical axis.

In the short run, a firm's MC curve can be upward sloping due to factors such as limited capacity and variable inputs. This means that as the firm produces more output, the cost of producing each additional unit increases. The MC curve typically intersects the average variable cost (AVC) and average total cost (ATC) curves at their minimum points.

Let's say the MC curve is rising, and currently, Mbeya cement company is producing an output level where its MC exceeds its price. This leads to losses, as the cost of producing each additional unit is higher than the revenue generated from selling it.

Now, suppose the chief economist suggests that if the price rises slightly, the output should not be increased. The reason is that increasing output would also increase the MC curve, potentially leading to even higher costs and larger losses. By keeping the output level unchanged, the firm avoids the higher costs associated with increasing production.

Graphically, this scenario would be represented as follows:

|
_______________MR______________|
/ |
/ |
/ |
/ | MC
/ |
| |
| AVC |
| |
|_________________ATC________________|

In the graph above, MR represents the marginal revenue curve, which is downward sloping for a perfectly competitive firm. The MC curve is rising (upward sloping) as defined earlier. AVC and ATC represent the average variable cost and average total cost curves, respectively.

The output level at which the MC curve intersects the MR curve is the profit-maximizing level for the firm. However, in this case, if the price increases slightly, the output level should not be increased because it would result in a higher MC and increased losses. Therefore, the firm would continue to produce at the current output level where MC equals MR, even if it leads to losses.

By restraining output despite a price increase, the firm avoids the additional costs associated with producing more units and minimizes its losses.

To explain the situation using graphs, let's start by considering the short run marginal cost (MC) curve for Mbeya Cement Company. The MC curve represents the additional cost incurred in producing one more unit of output in the short run.

In this case, we know that the MC curve is upward sloping, indicating that as the company increases its output, the cost of producing each additional unit also increases. This is a typical characteristic of many production processes due to diminishing returns to scale or other factors.

Now, let's assume that the current price at which Mbeya Cement Company sells its product is below the average total cost (ATC) curve, resulting in an operating loss. This can be represented by the following graph:

[Graph 1: MC, ATC, and Price]

```
^
| P (Price)
|
ATC ----- |
|
MC ---------> Quantity of Output
```

In this graph, the MC curve intersects the ATC curve at the quantity of output where the company is currently operating. The distance between the ATC curve and the price represents the loss being incurred per unit of output.

Now, let's analyze the economist's statement that increasing output should not be done even if the price rises a little. According to the economist, if the output is increased, the MC curve will shift upwards, leading to an even higher loss per unit of output. This can be illustrated using the following graph:

[Graph 2: Shift in MC Curve]

```
^
|
|
MC2 --------
MC1 --------> Quantity of Output
|
|
|
```

In this graph, the original MC curve (MC1) is shown, representing the current cost structure. If the output is increased due to a small rise in price, the MC curve will shift upwards to MC2. This upward shift indicates that the cost of producing each additional unit has increased, potentially resulting in a higher loss per unit.

By not increasing output despite a small increase in price, the economist's reasoning is to avoid further losses as the marginal cost exceeds the price. However, it is important to note that decision-making in real-world scenarios involves multiple factors, not limited to the cost structure alone.