Detail description on the topic cost and supply analysis.

1. ETHIRAJ COLLEGE FOR WOMEN (Autonomous)
Chennai – 600 008
Prepared by
Deepika R
Department of Business Economics (SS)
Supply and Cost analysis

2. Supply and Cost analysis
Supply is a fundamental economic concept that describes the total amount of a
specific good or service that is available to consumers.
Factors affecting supply-
A decrease in costs of production. This means business can supply more at
each price. Lower costs could be due to lower wages, lower raw material costs
More firms. An increase in the number of producers will cause an increase in
supply.
Investment in capacity. Expansion in the capacity of existing firms, e.g.
building a new factory

3. Weather. Climatic conditions are very important for agricultural
products
Productivity of workers. If workers become more motivated and
work hard, then there will be significant increase in output and
supply.
Technological improvements. Improvements in technology, e.g.
computers or automation, reducing firms costs.

4. Law of Supply
• Law of supply states that other factors remaining constant, price and quantity
supplied of a good are directly related to each other.
•

5. • In the above tabular representation, we can see that when the price increases
from Rs. 10, Rs 20, Rs 30& Rs 40, the quantity supplied increases to 10, 13,
20, 25 units. Which makes us clear that, there is a positive relationship
between price and quantity supplied.
• In the graphical representation, x axis represents quantity supplied & y axis
represents price. As the relationship between price and supply is direct, the
supply curve moves upwards from right to left.

6. Elasticity of supply
The price elasticity of
supply (PES or Es) is a measure
used in economics to show the
responsiveness, or elasticity, of
the quantity supplied of a good or
service to a change in its price.

7. Concept of cost
• In a business, cost expresses the amount of money that is spent on the
production or creation of a good or service.
• A sunk cost refers to money that has already been spent and which cannot
be recovered.
• Future cost- An estimated quantification of the amount of a prospective
expenditure. For example, when a business is determining its budget for
a future time frame, an estimated of the future cost

8. • Direct cost- A direct cost is a price that can be directly tied to
the production of specific goods or services.
• Indirect cost- Indirect costs are costs that are not directly
accountable to a cost object. Indirect costs may be either fixed
or variable. Indirect costs include administration, personnel and
security costs. These are those costs which are not directly
related to production. Some indirect costs may be overhead.
• Fixed cost- Cost which does not vary with output.
• Variable cost- Cost which varies with output.

9. • Total Fixed Cost (TFC) – costs
independent of output, e.g. paying
for factory
• Marginal cost (MC) – the cost of
producing an extra unit of output.
• Total variable cost (TVC) = cost
involved in producing more units,
which in this case is the cost of
employing workers.
• Average Variable Cost AVC = Total
variable cost / quantity produced
• Total cost TC = Total variable cost
(VC) + total fixed cost (FC)
• Average Total Cost ATC = Total
cost / quantity

10. Cost Curves

11. Relationship between AC and MC
In the graph ,where short-run average cost curve AC and marginal cost
curve MC are drawn. As long as short-run marginal cost curve MC lies
below short-run average cost curve, the average cost curve AC is
falling. When marginal cost curve MC lies above the average cost curve
AC, the latter is rising.
At the point of intersection L where MC is equal to AC, AC is neither
falling nor rising, that is, at point L, AC has just ceased to fall but has
not yet begun to rise. It follows that point L, at which the MC curve
crosses the AC curve to lie above the AC curve is the minimum point of
the AC curve. Thus, marginal cost curve cuts the average cost curve at
the latter’s minimum point.
i. If MC < AC, then AC must be falling.
ii. If MC = AC, then AC is constant.
iii. If MC > AC, then AC is rising.