Download elasticity of supply

OHT 4.1
CHAPTER 4.
Analysis of the firm’s supply decision
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The derivation of the firm’s supply curve.
Conditions of supply.
Elasticity of supply.
Supply chains and value added.
Transaction costs and the resource-based theory of
supply.
Forms of integration of firms.
Producer surplus.
In particular, our focus is on two of the most important
questions facing managers:
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How much should be produced and supplied?
How should the supply chain be organised?
Lecture 4, Business Economics
OHT 4.2A
Learning outcomes
This chapter will help you to:
• Understand the nature of the firm’s supply decision and
the derivation of the firm’s supply curve.
• Appreciate how price and non-price factors impact
upon supply decisions.
• Measure the responsiveness of supply to changes in
the price of the good or service in question – the
elasticity of supply.
• Recognise the importance of supply chains and value
chains in organising the supply of goods and services.
• Comprehend the significance of transaction costs in
decisions by a firm as to whether to buy in (or
outsource) inputs into the production process or to
employ the inputs in-house.
Lecture 4, Business Economics
OHT 4.2B
Learning outcomes
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Distinguish between transaction costs and resourcebased theory approaches to analysing the organisation
of supply.
Understand the various forms of corporate structure in
terms of vertical, horizontal and conglomerate
integration within the context of supply decisions.
Identify the existence of producer surplus.
Lecture 4, Business Economics
Deriving the
firm’s supply
curve
OHT 4.3
Figure 4.1 Deriving the supply curve for a firm in a competitive environment
Lecture 4, Business Economics
OHT 4.4
In summary…..
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In the short run,a profit-maximising firm’s supply curve
in a (perfectly)competitive environment is mapped out
by the firm’s marginal cost curve (MC)lying above its
average variable cost curve (AVC).
The long-run supply curve in a (perfectly)competitive
environment is the firm’s marginal cost curve lying
above its average total cost curve (ATC).
Lecture 4, Business Economics
OHT 4.5
Conditions of supply
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Changes in costs of production.
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Prices of other products.
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Changes in profit expectations.
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Climate.
Lecture 4, Business Economics
OHT 4.6
Figure 4.2 Shifting the firm’s supply curve
Lecture 4, Business Economics
Elasticity of supply
OHT 4.7
Elasticity of supply
E2 = Percentage change in quantity supplied
Percentage change in price
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Relatively elastic supply 吠i.e.a small percentage change
in price brings about a relatively large percentage change
in quantity supplied.
Relatively inelastic supply 吠i.e.a relatively large
percentage change in price results in a relatively small
supply response.
Perfectly inelastic supply 吠i.e.the quantity supplied is
insensitive to any change in price.
Perfectly elastic supply 吠i.e.the quantity supplied is so
sensitive to a change in price that even a small reduction
in price will lead to nothing being supplied by the firm.
Lecture 4, Business Economics
OHT 4.8
Figure 4.3 Examples of supply elastics
Lecture 4, Business Economics
Supply and value chains
Figure 4.4 Supply chain and value added
Lecture 4, Business Economics
OHT 4.9
OHT 4.10
Figure 4.5 The Porter value chain
Source: Adapted and reprinted with the permission of The Free Press, a Division of Simon & Schuster from Competitive
Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter.
Lecture 4, Business Economics
OHT 4.11
Transaction costs and resource-based theory
Transaction costs in markets are the costs of negotiating,
monitoring and enforcing contracts.
Resource-based theory is concerned with the resources 紡
assets,skills and knowledge撲owned or controlled by the firm
and hence its ability or competence to supply goods and
services very competitively.
Lecture 4, Business Economics
OHT 4.12
Vertical, horizontal and conglomerate integration
Hierarchical forms of organising production are
associated with high levels of integration.
Integration can take three main forms, namely:
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Vertical integration.
Horizontal integration.
Conglomerate integration.
Lecture 4, Business Economics
Producer surplus
OHT 4.13
Producer surplus is the additional revenue that accrues to a firm when units of output
are sold at a price which is in excess of the price at which the firm would have been
prepared to supply, I.e. in excess of the marginal cost of production.
Figure 4.6 Producer surplus
Lecture 4, Business Economics
OHT 4.14A
Key learning points
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For a firm in a perfectly competitive industry, the supply curve
shows the amount that it is willing to supply at all possible
market prices.
A firm’s short-run supply curve is mapped out by the marginal
cost curve lying above its average variable cost curve.
A firm’s long-run supply curve is traced out by its marginal
cost curve lying above its average total cost curve.
A supply curve can only be derived from the marginal cost
curve for firms operating in very (strictly, ‘perfectly’ competitive
environments 釦the concept of a ‘supply curve’ is particularly
inappropriate when dealing with monopoly situations because a
monopoly is a price-maker, not a price-taker, and can thus
select the price 撲output combination on the demand curve so
as to maximise profits.
Lecture 4, Business Economics
Learning outcomes
OHT 4.14B
The elasticity of supply is defined as:
E2 = Percentage change in quantity supplied
Percentage change in price
The numerical value of E, will always be zero or
positive,with a figure of zero indicating that supply does not
respond at all to price changes; a figure of more than 1
indicating a relatively elastic response;and a figure of less
than 1 a relatively inelastic response.
The supply chain shows the different stages in the
production and supply of outputs, e.g. in the case of a
manufacturing process,the provision of materials and
components,the physical production of the product,its
eventual distribution and sale, and after sales service.
Lecture 4, Business Economics
OHT 4.14C
Learning outcomes
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The value chain identities where value is created (or
lost) at each stage of the supply (production and
distribution) process.
The boundary of the firm can be explained by
transaction cost theory and the resource-based
theory of the firm.
Transaction costs are the costs of negotiating,
monitoring and enforcing market contracts for the
inputs of goods and services.
Resource-based theory is concerned with the
assets,skills and knowledge (i.e.core competencies
and distinctive capabilities) which are (a) specific to
the firm, (b) difficult to imitate and (c)are able to give
the firm a distinct competitive advantage in the market
place.
Lecture 4, Business Economics
Learning outcomes
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OHT 4.14D
Vertical integration is the bringing together under
one ownership and control of different stages in the
production of a given good or service.
Horizontal integration occurs when two or more
firms,at the same stage of production, integrate 勃
usually leading to more market concentration and
hence less competition in the product market.
Conglomerate integration occurs when a firm enters
different markets or industrial sectors.
Producer surplus is the additional revenue that
accrues to a firm when units of output are sold at a
price which is in excess of the price at which the firm
would have been willing to supply,i.e. in excess of the
marginal cost of production.
Lecture 4, Business Economics