supply & cost analysis

8/8/2019 Supply & Cost Analysis

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12/3/201012/3/2010 Dawn Jose , Faculty SJCET School Of Dawn Jose , Faculty SJCET School OfManagementManagement

Theory of SupplyTheory of Supply


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12/3/2010 Dawn Jose , Faculty SJCET School Of

Management


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Management

Law of SupplyLaw of Supply

Ceteris paribus, the quantity of

commodity produced and offered forsale will increase as the price of thecommodity rises and decreases as the

price falls Prof. LipseyAssumes a direct relationship betweenAssumes a direct relationship between

price and quantity suppliedprice and quantity supplied..

Quantity Supplied: The amount offered forsale in the market at a particular price at agiven time ,other factors remainingunchanged


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The principle that suppliers will normallyThe principle that suppliers will normally

offer more for sale at higher prices and lessoffer more for sale at higher prices and lessat lower prices.at lower prices.

Why do producers produce more outputWhy do producers produce more outputwhen prices rise?when prices rise?

They seek higher profitsThey seek higher profits

They can cover higher marginal costs ofThey can cover higher marginal costs ofproductionproduction


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Supply Schedule TheSupply Schedule The supply schedulesupply schedule is ais atable that shows the relationship betweentable that shows the relationship between

the price of the good and the quantitythe price of the good and the quantitysupplied.supplied.

Supply Schedule of FelixSupply Schedule of Felix

QTY OF CONESQTY OF CONES

SUPPLIEDSUPPLIED


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Supply CurveSupply Curve

TheThe supply curvesupply curve is the graph of theis the graph of therelationship between the price of a good andrelationship between the price of a good andthe quantity supplied.the quantity supplied.

QTY OF CONESQTY OF CONES

SUPPLIEDSUPPLIED


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Market Supply VS Individual SupplyMarket Supply VS Individual Supply

Market supply refers to the sum of allMarket supply refers to the sum of allindividual supplies for all sellers of aindividual supplies for all sellers of a

particular good or service.particular good or service. Graphically, individual supply curves areGraphically, individual supply curves are

summed horizontally to obtain the marketsummed horizontally to obtain the marketsupply curve.supply curve.


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Determinants of SupplyDeterminants of Supply

PProductivityroductivity (Improvements in machines and(Improvements in machines andproduction processes of a good or service)production processes of a good or service)

IInputsnputs ( Change in the price of inputs required to( Change in the price of inputs required toproduce the good or service.)produce the good or service.)

GGovernment Actionsovernment Actions ((Subsidies, Taxes andSubsidies, Taxes andRegulations)Regulations)

TTechnologyechnology (Improvements in machines and(Improvements in machines and

production processes of a good or service)production processes of a good or service) EExpectations (outlook of future prices and profits)xpectations (outlook of future prices and profits)

SSize of Industryize of Industry (Number of firms in the industry)(Number of firms in the industry)


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Change in Supply Vs Shift in SupplyChange in Supply Vs Shift in Supply

Change in Quantity SuppliedChange in Quantity Supplied Movement along the supply curve.Movement along the supply curve.

Caused by a change in price.Caused by a change in price.


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Shift in the supply CurveShift in the supply Curve

A shift in the supply curve, either to the left orA shift in the supply curve, either to the left orright.right.

Caused by a change in a determinant other thanCaused by a change in a determinant other thanprice.price.


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What can causea change insupplytoWhat can causea change insupplytothe right?(Increase insupply)the right?(Increase insupply)

Lower cost of inputs such as cheaper laborLower cost of inputs such as cheaper laboror cheaper packagingor cheaper packaging

More productive/better trained labor.More productive/better trained labor.

New technology like more fuel efficientNew technology like more fuel efficientdelivery vehicles, better/faster machinesdelivery vehicles, better/faster machines

Lower taxes/government subsidies (subsidyLower taxes/government subsidies (subsidy

is a government payment to an individual oris a government payment to an individual orbusiness to encourage or protect a certainbusiness to encourage or protect a certaineconomic activity.)economic activity.)


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What can causea change insupplytoWhat can causea change insupplytotheleft?(Decrease insupply)theleft?(Decrease insupply)

More expensive laborMore expensive labor

Higher taxesHigher taxes

Less efficient workersLess efficient workersBroken technologyBroken technology

Withdrawal of subsidiesWithdrawal of subsidies


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SUPPLYAND DEMANDSUPPLYAND DEMANDTOGETHERTOGETHER

EquilibriumEquilibrium refers to a situation in whichrefers to a situation in whichthe price has reached the level wherethe price has reached the level wherequantity supplied equals quantityquantity supplied equals quantitydemanded.demanded.

Equilibrium PriceEquilibrium Price

The price that balances quantity suppliedThe price that balances quantity suppliedand quantity demanded.and quantity demanded.

On a graph, it is the price at which theOn a graph, it is the price at which thesupply and demand curves intersect.supply and demand curves intersect.


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Equilibrium QuantityEquilibrium Quantity

The quantity supplied and the quantityThe quantity supplied and the quantitydemanded at the equilibrium price.demanded at the equilibrium price.

On a graph it is the quantity at which theOn a graph it is the quantity at which the

supply and demand curves intersect.supply and demand curves intersect.


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Market Equilibrium andMarket Equilibrium andDisequilibriumDisequilibrium


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Supply ElasticitySupply Elasticity

Supply elasticity is caused by the abilitySupply elasticity is caused by the abilityof a producer to change output.of a producer to change output.

If producers can increase outputIf producers can increase output

quickly, supply is elastic.quickly, supply is elastic.If producers can not increase outputIf producers can not increase output

quickly, supply is inelastic.quickly, supply is inelastic.


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Supply ElasticitySupply Elasticity

Typeof ElasticityTypeof Elasticity Change in QuantityChange in QuantitySupplied DuetoaSupplied DuetoaChange in PriceChange in Price

ElasticElastic IF PE > 1IF PE > 1Unit ElasticUnit Elastic IF PE = 1IF PE = 1

InelasticInelastic IF PE

supply & cost analysis

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