BAEB602 MICROECONOMICS CHAPTER 5 BACKGROUND OF SUPPLYPREPARED BY:Nur Suhaili RamliSchool of Marketing andEntrepreneurship (SoME)FACULTY OF BUSINESS AND MANAGEMENT
CHAPTER 5: BACKGROUND OF SUPPLYObjectives 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
CHAPTER 5: BACKGROUND OF SUPPLYIntroduction 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
CHAPTER 5: BACKGROUND OF SUPPLYShort 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
CHAPTER 5: BACKGROUND OF SUPPLYTotal 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
CHAPTER 5: BACKGROUND OF SUPPLYExample: 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
CHAPTER 5: BACKGROUND OF SUPPLYAverage 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
CHAPTER 5: BACKGROUND OF SUPPLYMarginal 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
CHAPTER 5: BACKGROUND OF SUPPLYAnnouncement 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
CHAPTER 5: BACKGROUND OF SUPPLYAssignment 2 ( Group Assignment) – 10% TOPIC Find a group of 4 members. Answer All Questions below. Slide 15 of 17
CHAPTER 5: BACKGROUND OF SUPPLYAssignment 2 TOPIC Question 2 Slide 16 of 17
CHAPTER 5: BACKGROUND OF SUPPLYAssignment 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
CHAPTER 5: BACKGROUND OF SUPPLYAssignment 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
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