The Supply Curve. Diminishing Returns – Using Marginal Analysis Firms employing one additional unit to create another good or service.

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Presentation transcript:

The Supply Curve

Diminishing Returns – Using Marginal Analysis Firms employing one additional unit to create another good or service.

The Law of Diminishing Returns As we add more variable inputs to at least one fixed input total output increases at a decreasing rate.

Lesson Objective L.I : Working out the costs for a firm. L.O : To understand the explicit costs for a firm and how to calculate them.

The cost family (revision) Fixed Cost Variable Cost

FC vs VC to calculate TC Fixed Costs (FC) Output Variable Costs (VC) Total Costs (TC)

Lets add in more kids to the cost whanau Average Cost Average Variable Cost Average Fixed Cost

AC(ATC) and AVC and AFC Fixed Costs (FC) Output Variable Costs (VC) Total Costs (TC) Average Costs (AC) Average Variable Costs (AVC) Average Fixed Costs (AFC)

Add in the Marginal Cost!!! MC = TC1-TC2

Quick Quiz Quantity (cans of coke) Total Utility (TU) Marginal Utility (MU) (cents) Price (cents) Quantity of Coke cans Explain why this demand curve slopes downward to the right, for cans of coke.

Quick Quiz Quantity (cans of coke) Total Utility (TU) Marginal Utility (MU) (cents) Price (cents) Quantity of Coke cans A rational consumer will only purchase more cans of coke until point P=MU (optimal purchase rule) is reached. When the price of Coke falls, P<MU. Because P<MU, there is an incentive to increase consumption of coke. As consumption Increases MU falls. Therefore a demand curve is drawn downward sloping to the right (i.e. as price falls, quantity demanded will increase)

Lesson Objective L.I : Working out the costs for a firm. L.O : To understand the explicit costs for a firm and how to calculate them.

Curve exploration Lets look at the Curves and come up with some conclusions!!!! Split into groups: Group 1 – AFC curve shape Group 2 – MC shape Group 3 – AVC shape Group 4 – AC shape Group 5 – At what points does MC cut the AC and AVC Group 6 – Distance between AC and AVC (the gap between them)

Some important questions Why would a firm not supply when P<MC? Why, when MC intersects AVC and AC do both AVC and AC slope upwards? Why, does the gap between AVC and AC grow closer as output increases? What does the intersection between AVC and MC represent?

Table QuantityFCVCTCAFCAVCACMC

Some important points. The Shut down point AVC = MC The Break even point AC = MC

Quick Test 1.At what unit does DIMINISHING RETURNS set in? 2.At what point is shutdown point and at what output in the table does this occur? 3.Why will they not supply any output at this price? 4.At what point is breakeven point and at what output on the table does this occur? 5.Complete the schedule PriceQuantity $30 $50 $70

Quick Test 1.At what unit does DIMINISHING RETURNS set in? 4 2.At what point is shutdown point and at what output in the table does this occur? MC = AVC, 5 3.Why will they not supply any output at this price? They are not covering any FC and all of their VC 4.At what point is breakeven point and at what output on the table does this occur? MC = AC, Complete the schedule PriceQuantity $300 $507 $709

Shape of the Supply Curve Explain why the Supply Curve is sloped upwards to the right. Diminishing Returns suggests more inputs are required to produce an extra unit of output. Given more variable inputs are required to increase output marginal costs increase. A firm will only increase output if they receive a higher price to cover the additional cost of producing. Therefore the increasing MC will cause the supply curve to slope upward to the right.

Change in Costs Explain what happens to our cost curves if electricity cost go up.

Quick test Labour costs have gone up for this business. Explain what happens to output position at shutdown point. Use a diagram to help you Explain what happens to output position at breakeven point. Use a diagram to help you Explain why the supply curve in the short run slopes upwards to the right.

Answers Diminishing Returns suggests more inputs are required to produce an extra unit of output. Given more variable inputs are required to increase output marginal costs increase. A firm will only increase output if they receive a higher price to cover the additional cost of producing. Therefore the increasing MC will cause the supply curve to slope upward to the right.

Putting it together. Market Equilibrium!!!!! Revision, tax and elasticity!!!