Transcript Supply and costs

© 2012 Taylor & Francis
Chapter 5
Supply and costs
© 2012 Taylor & Francis
By the end of this section 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
Learning Outcomes
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© 2012 Taylor & Francis
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.
Price elasticity of supply
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© 2012 Taylor & Francis
time period
availability of
stocks
spare capacity
flexibility of
capacity / resource
mobility
Factors affecting price elasticity of supply
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How readily can a destination
cope with sudden increases in
demand?
E.g. the Cole Classic
Marathon Swim, Bondi Beach
Hotels?
Rubbish clearance?
Cafes?
Parking?
Water?
Snacks?
Ice creams?
Roads?
Supply elasticity
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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
Supply and costs
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Short-run costs
Fixed costs
Variable costs
Total costs
Average costs
Marginal costs
Short run
Diminishing
returns
Short-run costs
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Long run
Economies of scale
financial
buying and selling
managerial /
specialization
technical
economies of
increased dimensions
risk-bearing
Diseconomies of scale
Long run costs
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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?
Short and long run costs
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Internal growth
Mergers and take-overs
vertical integration
horizontal integration
conglomerate merger
How firms grow
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What examples and benefits are there to this company of
Horizontal integration?
Vertical integration?
Are there any potential dis-economies of scale?
Intercontinental
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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.
Social and private costs
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What are the private costs?
What are the social costs?
Private and social costs
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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.
Review of key terms
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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
Review of key terms
© 2012 Taylor & Francis