Unit 3: Production and Output

Decisions
Lecture 6: Constructing the Supply Curve

1 MBA Business Economics Lecture 6, Dr Dawid Trzeciakiewicz

 Costs, Revenues and Outputs
Revisited
• Lecture 5 produced graph on 𝑀𝐶
the right 𝐴𝑇𝐶2
• Average revenue is essentially
the price and is constant. 𝐴𝑉𝐶1
• 𝐴𝑅1 and 𝐴𝑉𝐶1 make point 𝑦 the
short run shut down point 𝑧 𝐴𝑅2
• Based on 𝐴𝑇𝐶2 and 𝐴𝑅1 point 𝑧
has all costs covered so the
firm continues to produce in 𝑦 𝐴𝑅1
the long run
• This is the basis of the supply
curve…
𝑄

2 MBA Business Economics Lecture 6, Dr Dawid Trzeciakiewicz

 Towards the Supply Curve…
• Below 𝑦 the firm will shut 𝑀𝐶
down 𝐴𝑇𝐶2
• Above 𝑦 the firm is happy to
trade in the short run 𝐴𝑉𝐶1
• Above 𝑧 the firm is covering all
of its costs and is very happy 𝑧 𝐴𝑅2
to trade in both the short and
long run
• The supply curve is thus the 𝑦 𝐴𝑅1
section of the 𝑀𝐶 curve that
lies to the right of the short
run shut down point
𝑄

3 MBA Business Economics Lecture 6, Dr Dawid Trzeciakiewicz

 The Supply Curve
The quantity that firms are willing and able to supply to the
market at a given price

• Rational firms will not be willing to offer at a loss, especially not to

the left of the short run shut down point
• Logically if the price is higher then the firm would be willing to
supply more of the product – this gives an upward sloping curve
• To calculate market supply sum together the individual supply
curves of all sellers who are active in the market
• Fixed factors of production mean firms are constrained – but
supply curve shifts are very possible when factors can change

4 MBA Business Economics Lecture 6, Dr Dawid Trzeciakiewicz

 Movements of the Supply Curve
• Increasing capacity can allow more
output at a given price to utilise
• Interruptions to the production
process reduce output
• Automated production lines can
run longer and create greater
output for a given cost
• Consider – what will alter the
marginal cost of production?
• Why do we not consider what will
alter revenue?

5 MBA Business Economics Lecture 6, Dr Dawid Trzeciakiewicz

 Elasticity of Supply
• Analogous to demand case – measures changes in supply as a
result of changes in price
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑂𝑢𝑡𝑝𝑢𝑡 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑
𝐸𝑆 =
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
• Elasticity of supply affected by many factors, the level of spare
capacity and time period is important
• When you have spare capacity the cost of producing more is low as
you already have the resources in place. Marginal costs are low.
• Over time the ability to produce is more flexible as all factors can
be adjusted – the curve will become more elastic.
• How much spare capacity should a firm carry?

6 MBA Business Economics Lecture 6, Dr Dawid Trzeciakiewicz

 Summary
• Costs will play a vital part in determining how much firms are
willing and able to supply to the market
• Specifically the marginal cost curve above the short run shut down
point can be thought of as the supply curve for an individual firm
• Market level supply is the aggregation of supply from all of the
sellers in the market
• Elasticity of supply therefore depends on the slope of the marginal
cost curve – descriptions of elastic and inelastic are linked to slope
in the same way as for demand
• We now have both curves ready for market analysis in Unit 4.

7 MBA Business Economics Lecture 6, Dr Dawid Trzeciakiewicz