BAEB602 Chapter 5: Background of Suppply (part 2)

BAEB602
MICROECONOMICS

CHAPTER 5
BACKGROUND OF SUPPLY

PREPARED BY:
Nur Suhaili Ramli

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

CHAPTER 5: BACKGROUND OF SUPPLY
Objectives
TOPIC

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

Slide 2 of 17

Introduction
TOPIC

 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

Slide 3 of 17

Short Run Vs Long Run
TOPIC

 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.
Slide 4 of 17

Total Cost (TC)
TOPIC

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

TC = TVC + TFC
 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.

Slide 5 of 17

Example:
TOPIC

Output TFC TVC TC
(Q) ($) ($) ($)
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 vertically
Upwards by $12.

Slide 6 of 17

Exercise 5.1
TOPIC

Complete this table.

Output TFC TVC TC
(Q) ($) ($) ($)
0 14 0
1 14 10
2 14 16
3 14 21
4 14 28
5 14 40
6 14 60
7 14 91

Slide 7 of 17

Exercise 5.1
TOPIC

Complete this table. (Answer)

Output TFC TVC TC
(Q) ($) ($) ($)
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

Slide 8 of 17

Average and Marginal Cost
TOPIC

 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:

AC = TC / Q
 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 = AFC + AVC

Slide 9 of 17

Marginal Cost (MC)
TOPIC

 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.

MC = TC
Q
 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 = $40 = 4c
Q 1000

Slide 10 of 17

Example:
TOPIC

Output TFC AFC TVC AVC TC AC MC
(Q) ($) (TFC/Q) ($) (TVC/Q) (TFC+TVC) (TC/Q) ( 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

Slide 11 of 17

Exercise 5.2
TOPIC

($) ($) ($) ($) ($)
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.

Slide 12 of 17

Answer for exercise 5.2
TOPIC

($) ($) ($) ($) ($)
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.

Slide 13 of 17

Announcement
TOPIC

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.

Slide 14 of 17

Assignment 2 ( Group Assignment) – 10%
TOPIC
 Find a group of 4 members.
 Answer All Questions below.

Slide 15 of 17

Assignment 2
TOPIC

 Question 2

Slide 16 of 17

Assignment 2
TOPIC

 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.

.

Slide 17 of 17

Assignment 3 (Individual)- 10%
TOPIC

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

Slide 18 of 17

BAEB602 Chapter 5: Background of Suppply (part 2)

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