BAEB602 Chapter 5: Background of Suppply (part 2)

BAEB602

School of Marketing and Entrepreneurship (SoME)FACULTY OF BUSINESS AND MANAGEMENT

PREPARED BY:Nur Suhaili Ramli

CHAPTER 5

MICROECONOMICS

BACKGROUND OF SUPPLY

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CHAPTER 5: BACKGROUND OF SUPPLY

Objectives

To identify short-run costs To identify long-run costs To understand the various of costs To apply theories in case study

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Introduction

Firms wants to increase output in hurry, it will only be able to increase the quantity of certain inputs. It can use more raw materials, more fuel, more tools and possibly more labors.

These can be differentiate between fixed factors and variable factors.

What is fixed factors? An input that cannot be increased in supply within a given time period.

What is variable factors? An input that can be increased in supply within a given time period.

Short Run Long Run

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Short Run Vs Long Run

What is short run? The period of time over which at least one factor is fixed. Example: renting

on land is fixed.

What is long run? The period of time long enough for all factors to be varied. Example: the

cost of raw material is various.

A firm’s cost of production will depend on the factors of production it uses. The more factors it uses, the greater its costs will be. This relationship depends on two elements:

1. The productivity of the factors – the greater their productivity, the smaller will be the quantity of them that is needed to produce.

2. The price of the factors – the higher their price, the higher will be the costs of production.

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Total Cost (TC)

Total Cost (TC) of production is the sum of the total variable costs (TVC) and the total fixed cost (TFC) of production.

Fixed Cost (FC) = Total costs that do not vary with the amount of output produced.

Variable Cost (VC) = Total costs that do vary with the amount of output produced.

TC = TVC + TFC

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Example:

Output (Q)

TFC ($)

TVC($)

TC($)

0 12 0 12

1 12 10 22

2 12 16 28

3 12 21 33

4 12 28 40

5 12 40 52

6 12 60 72

7 12 91 103

Since TC = TVC + TFC, the TC curve is simply the TVC curve shifted verticallyUpwards by $12.

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Exercise 5.1

Output (Q)

TFC ($)

TVC($)

TC($)

0 14 0

1 14 10

2 14 16

3 14 21

4 14 28

5 14 40

6 14 60

7 14 91

Complete this table.

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Exercise 5.1

Output (Q)

TFC ($)

TVC($)

TC($)

0 14 0 14

1 14 10 24

2 14 16 30

3 14 21 35

4 14 28 42

5 14 40 54

6 14 60 74

7 14 91 105

Complete this table. (Answer)

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Average and Marginal Cost

In addition to total costs (TC, TFC, and TVC), there are two other categories of costs that we will be using. There are average cost and marginal cost.

Average cost (AC) is cost per unit of production:

Example : If it costs a firm $2000 to produce 100 units of a product, the average cost would be $20 for each unit ($2000/100).

Like Total cost, average cost can be divided into the two components, fixed and variable. In other words, average cost equals average fixed cost (AFC = TFC/Q) plus average variable cost (AVC=TVC/Q)

AC = TC / Q

AC = AFC + AVC

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Marginal Cost (MC)

Marginal cost (MC) is the extra cost of producing one more unit: that is, the rise in total cost per one unit rise in output.

Example: A firm is currently producing 1000000 boxes of matches a month. It now increases output by 1000 boxes (another batch): Q =1000. Assume that, as a result, total costs rise by $40: TC =$40. What is the cost of producing one more box of matches? It is:

MC = TC Q

MC = TC = $40 = 4c Q 1000

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Example:

Output(Q)

TFC($)

AFC(TFC/Q)

($)

TVC($)

AVC(TVC/Q)

($)

TC(TFC+TVC)

($)

AC(TC/Q)

($)

MC ( TC/ Q)

($)

0 12 - 0 - 12 -

1 12 12 10 10 22 22 10

2 12 6 16 8 28 14 6

3 12 4 21 7 33 11 5

4 12 3 28 7 40 10 7

5 12 2.4 40 8 52 10.4 12

6 12 2 60 10 72 12 20

7 12 1.7 91 13 103 14.7 31

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Exercise 5.2

Output(Q)

TFC($)

AFC(TFC/Q)

($)

TVC($)

AVC(TVC/Q)

($)

TC(TFC+TVC)

($)

AC(TC/Q)

($)

MC ( TC/ Q)

($)

0 16 0

1 16 10

2 16 16

3 16 21

4 16 28

5 16 40

6 16 60

7 16 91

Complete the table.

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Answer for exercise 5.2

Output(Q)

TFC($)

AFC(TFC/Q)

($)

TVC($)

AVC(TVC/Q)

($)

TC(TFC+TVC)

($)

AC(TC/Q)

($)

MC ( TC/ Q)

($)

0 16 - 0 - 16 -

1 16 16 10 10 26 26 10

2 16 8 16 8 32 16 6

3 16 5.3 21 7 37 12.3 5

4 16 4 28 7 44 11 7

5 16 3.2 40 8 56 11.2 12

6 16 2.6 60 10 76 12.6 20

7 16 2.3 91 13 107 15.2 31

Complete the table.

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Announcement

There is no class NEXT WEEK for both sessions.

5 July 2011, Tuesday

6 July 2011, Wednesday

Class will be as usual on 12 July & 13 July 2011.

Please download all notes from link posted in my facebook or visit www.4shared.com and search the file name.

http://www.4shared.com/

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Assignment 2 ( Group Assignment) – 10%

Find a group of 4 members. Answer All Questions below.

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Assignment 2

Question 2

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Assignment 2

Question 3

Describe THREE basic assumptions about market participants in microeconomics?

Question 4

Describe FOUR types of goods available with examples.

Question 5

Differentiate between Shift and Movement phenomenon in Supply and Demand

with suitable diagram.

.

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Assignment 3 (Individual)- 10%

Find an article about a company (Any company). Analyze business activity

which must include the following:

1. Demand,

2. Supply

3. Whether it reach market equilibrium?

4. Behavior of customers

5. Cost involved in the business. Short run or long run business?

6. How can this business contribute to the economics growth?

Please attach together the article with your answer.

Specification: Font type: Times New Roman, 12 Font size, paragraph spacing 1.5

Cover page: Full name, Student ID, Student IC/Passport, Class code

Date post:	20-Oct-2014
Category:	Business
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BAEB602 Chapter 5: Background of Suppply (part 2)

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