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5 Supply and Costs

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© John Tribe

Learning outcomesBy 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

• 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– 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 dis-economies 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