Industry Supply Curve

PowerPoint Diagram Pack Industry Supply Curve Analysis Industry Supply Curve Analysis is a visual representation of the Law of Supply—and provides insight into competitive pricing and production dynamics. Also includes Cost Curve Analysis (ATC, AFC, AVC, Breakeven Point, and Shutdown Points).
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UNIT PRODUCTION COST Old Market Price New Market Price Added Capacity

Contents
Overview 4
Benefits & Limitations 6
Cost Curve Analysis 7
Overview 8
Cost Curves 9
Supply Curve Analysis 11
10-Step Approach 12
Example 24

The Industry Supply Curve is a graphic representation of the Law of Supply—and provides insight into competitive pricing dynamics Supply Curve Analysis Overview The Industry Supply Curve is graphic representation of the Law of Supply, which states that there is a direct relationship between price and quantity supplied. The Supply Curve slopes upward to the right. The slope tells us that the quantity supplied varies directly with price. Analyzing the Industry Supply Curve also provides insight into competitive pricing dynamics and helps with scenario-based game analysis. The example provided at the end of this document illustrate the impact to price and competition as one player decides to change its production capacity. CUMULATIVE PRODUCTION UNIT PRODUCTION COST Segment 1 Segment 2 Segment 3 Segment 4 Seg 5 S6 Short-run Industry Supply Curve Long-run Industry Supply Curve INDUSTRY SUPPLY CURVE THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

Formulation and understanding of Industry Supply Curves is dependent on Cost Curve Analysis Cost Curve Analysis Overview Cost Curves are used to illustrate the relationship between production costs and production capacity KEY DEFINITIONS
Total Cost of Production (TC) – This includes all costs associated with the delivery of value to the customer; e.g. transportation, installation, guaranteed service, etc.
These costs can broken down into Fixed Costs (FC) and Variable Costs (VC)
Average Total Cost = (FC + VC) / quantity produced
Fixed Costs (FC) – These costs are not tied to level of goods produced; e.g. plant maintenance, overhead, utilities, land, leases, insurance
Average Fixed Cost (AFC) = FC / quantity produced
Variable Costs (VC) – These costs are dependent directly on the quantity of good products; e.g. raw materials, wages/salaries, packaging, shipping
Average Variable Cost (AVC) = VC / quantity produced
KEY TRENDS/CONCEPTS
As production increases, the AFC per unit begins to fall as fixed costs are spread across an increasing number of units
As production increases, the AVC will initially decrease as increase in production leads to economies of scale (e.g. bulk discounts in raw materials)—however, after a certain a point, the AVC will begin to increase as production experiences diseconomies of scale (e.g. more employees, trucks)
As a result, the ATC per unit falls initially as companies experience economies of scale, but will eventually increase as diseconomies of scale kick in
The concepts outlined above explain the shapes of the Cost Curves
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Two important points to identify on the Cost Curves are the Breakeven Point and Shutdown Point Cost Curves – MC, Breakeven Point, Shutdown Point PRODUCTION QUANTITY UNIT PRODUCTION COST AVC ATC AFC MC Breakeven Point Shutdown Point Marginal Cost (MC) – the cost of producing 1 unit Breakeven Point is the value when MC = minimum ATC At this point, the company makes no money on the produced goods Shutdown Point is the value when MC = minimum AVC At this point, the company is operating at a loss and is indifferent from continued operations or shutting down temporarily THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

Step 5 Determine the total production cost for each competitor group Overview
Use your company’s detailed cost data to develop a cost model
Perform high-level activity based costing (ABC)—to do this, map your company’s product and delivery processes; and assign relevant costs to each
Assess the production “differences” experienced by the representative firms in other segments—this is done by estimating how the production process of each representative firm may differ from your own processes (e.g. machine technology, labor productivity, plant site location, delivery costs, warehousing costs, etc.)
The production costs of each competitor group should be assimilated based on the total production cost components (e.g. labor, raw materials, overhead, delivery) for that product or service
In other words, sum up all such Component Costs, where
Component Cost = (Cost of Input) x (Quantity of Input)
THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Define the industry and market boundaries. 1 Determine the industry structure. 2 Group producers into segments. 3 Select a representative producer within each segment. 4 Determine the total lifetime production cost for each representative producer. 5 Separate the fixed costs and variable costs for each segment’s representative producer. 6 Calculate the points of the representative firm’s Cost Curves. 7 Determine the total production capacity of each segment. 8 Plot the Industry Supply Curve. 9 Verify the resulting Industry Supply Curve. 10

Step 6 Separate fixed costs and variable costs for competitor Overview
You need to separate fixed costs from variable costs to correct calculate and create the Cost Curves (and eventually the Industry Supply Curves)
The separation of costs into fixed and variable costs is necessary for finding the Shutdown Point
The long-run Industry Supply Curve, however, can be created with just the total costs
This is done by determining which costs related to the production and delivery of the product or service do not fluctuate with the level of production
Fixed costs are incurred even if production equaled zero

Step 7 Calculate the points of the representative company’s cost curves Overview
Assuming the representative company is producing at maximum/full capacity, calculate the following:
Average Total Cost ATC = (VC+FC) / (total quantity produced)
Average Fixed Cost AFC = FC / (total quantity produced)
Average Variable Cost AVC = VC / (total quantity produced)

Segment 3 can aggressively increase capacity to push out Segment 4 Industry Supply Curve Analysis – Example (cont.) CUMULATIVE PRODUCTION UNIT PRODUCTION COST Segment 1 Segment 2 Segment 3 Seg 4 Segment 5 S6 Segment 3 can drive out Segment 4 by increasing capacity past the Market Demand—this will also lower the overall Market Price (and therefore erode margins). Market Demand Old Market Price New Market Price Overcapacity Added Capacity The New Market Price would likely fall to just below the AVC of Segment 4 ATC AVC THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

END OF PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

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Industry Supply Curve

by David Tracy

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