Economics

Economics

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...