Transcript 5 Supply and Costs

5 Supply and Costs
© John Tribe
© John Tribe
Learning outcomes
By studying this chapter students will be able to:
• understand and utilize the concept of elasticity of supply
• identify the factors of production
• distinguish between fixed and variable factors of
production
• analyse the relationship between costs and output in the
short run and long run
• establish the relationship between costs and the supply
curve
• understand the reasons for economies of scale
• identify methods and rationale for growth
• distinguish between social and private costs
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Price elasticity of supply
• Elasticity of supply measures
– the responsiveness of supply to a change in price.
• This relationship may be expressed as a
formula:
– Percentage change in quantity supplied ÷ Percentage
change in price
• Where supply is inelastic it means
– that supply cannot easily be changed, whereas elastic
supply is more flexible.
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© John Tribe
Factors affecting price elasticity of
supply
• time period
• availability of
stocks
• spare
capacity
• flexibility of
capacity /
resource
mobility
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Supply elasticity
• How readily can a
destination cope with
sudden increases in
demand?
– E.g. the Cole Classic
Marathon Swim, Bondi
Beach
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Hotels?
Rubbish clearance?
Cafes?
Parking?
Water?
Snacks?
Ice creams?
Roads?
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Supply and costs
• Leisure and tourism inputs
– Land
• This includes natural resources such as minerals, and land
itself.
– Labour
• This includes skilled and unskilled human effort.
– Capital
• This includes buildings, machines and tools.
– Enterprise
• This is the factor which brings together the other factors of
production to produce goods and services.
– Fixed and variable factors
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Short-run costs
• Short-run costs
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Fixed costs
Variable costs
Total costs
Average costs
Marginal costs
• Short run
– Diminishing
returns
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Long run costs
Long run
– Economies of scale
• Financial
• buying and selling
• Managerial /
specialization
• technical
• economies of
increased
dimensions
• risk-bearing
– Diseconomies of
scale
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Short and long run costs
• What happens to
average short run
costs of a hotel as
occupancy falls?
• How will the hotel
respond to a long run
fall in occupancy?
• How do hotels benefit
from economies of
scale?
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How firms grow
• internal growth
• mergers and take-overs
– vertical integration
– horizontal integration
– conglomerate merger
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My Travel
• What examples and
benefits are there to
this company of
– Horizontal integration?
– Vertical integration?
• Are there any
potential diseconomies of scale?
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Social and private costs
• Private costs of production are those costs
which an organization has to pay for its
inputs. They are also known as accounting
costs since they appear in an
organization’s accounts.
• Social costs do not appear in an
organization’s accounts and do not affect
its profitability, although they may well
affect the well-being of society at large.
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Private and social costs
• What are the private
costs?
• What are the social
costs?
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Review of key terms
• Price elasticity of supply
– responsiveness of supply to a change in price.
• Factors of production
– land, labour, capital and enterprise.
• Fixed factor
– one that cannot be varied in the short run.
• Variable factor
– one that can be varied in the short run.
• Average cost
– total cost divided by output.
• Marginal cost
– the cost of producing one extra unit of output.
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Review of key terms
• Vertical integration
– merger at different stage within same industry.
• Horizontal integration
– merger at same stage in same industry.
• Conglomerate merger
– merger into different industry.
• Private costs
– costs which a firm has to pay.
• Social costs
– costs which result from output but which accrue to
society.
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5 Supply and Costs:
The End
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