Economics for Business
Lecture 2
Background to supply
Supply curve
Market Equilibrium - Demand and Supply together
Dr Alexander Tziamalis
1
Background to Supply
The law of diminishing returns
When increasing amounts of a variable factor
are used with a given amount of a fixed factor,
there will come a point when each extra unit of
the variable factor will produce less extra
output than the previous unit.
Background to Supply
Total Output
Average Output
AO = Total Output/Total number of Workers
Marginal Output
MO = Difference in Output / Difference in the
number of workers
Wheat production per year from a
particular farm (tonnes)
Tonnes of wheat per year
Tonnes of wheat per year
Wheat production per year from a particular farm
Total Output
Number of
farm workers (L)
Average output = Total / L
Average Output
Number of
farm workers (L)
Marginal Output
Tonnes of wheat per year
Tonnes of wheat per year
Wheat production per year from a particular farm
Total Output
b
Diminishing returns
set in here
Number of
farm workers (L)
b
Average
Number of
farm workers (L)
Marginal
Costs of Production
Fixed costs and variable costs
Total costs
total fixed cost (TFC)
total variable cost (TVC)
total cost (TC = TFC + TVC)
Output TFC TVC
(Q)
(£)
(£)
0
1
2
3
4
5
6
7
12
12
12
12
12
12
12
12
0
10
16
21
28
40
60
91
TC
(£)
12
22
28
33
40
52
72
103
Total costs for firm X
TC
TVC
TFC
Now, a very important type of cost: The
Marginal cost
Marginal Cost is how much extra money, an extra
unit of product will cost you.
So for example, if it costs 10 pounds to produce 1 unit
and it costs 15 pounds to produce two units: then the
marginal cost for the second unit is 5 (the extra cost of
one unit).
The marginal cost usually goes down at the beginning of
production and then it starts going up faster and...