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5 Supply and Costs © John Tribe © John Tribe Learning outcomes By 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 © John Tribe 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. © John Tribe © John Tribe Factors affecting price elasticity of supply • time period • availability of stocks • spare capacity • flexibility of capacity / resource mobility © John Tribe 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? © John Tribe 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 © John Tribe Short-run costs • Short-run costs – – – – – Fixed costs Variable costs Total costs Average costs Marginal costs • Short run – Diminishing returns © John Tribe Long run costs Long run – Economies of scale • Financial • buying and selling • Managerial / specialization • technical • economies of increased dimensions • risk-bearing – Diseconomies of scale © John Tribe 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? © John Tribe How firms grow • internal growth • mergers and take-overs – vertical integration – horizontal integration – conglomerate merger © John Tribe My Travel • What examples and benefits are there to this company of – Horizontal integration? – Vertical integration? • Are there any potential diseconomies of scale? © John Tribe 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. © John Tribe Private and social costs • What are the private costs? • What are the social costs? © John Tribe 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. © John Tribe 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. © John Tribe 5 Supply and Costs: The End © John Tribe