© 2012 Taylor & Francis

Chapter 5

Supply and costs

© 2012 Taylor & Francis

Learning Outcomes

By the end of this section students will be able to:

understand and utilize the concept of elasticity of supplyidentify the factors of productiondistinguish between fixed and variable factors of productionanalyse the relationship between costs and output in the

short run and long runestablish the relationship between costs and the supply

curveunderstand the reasons for economies of scaleidentify methods and rationale for growthdistinguish between social and private costs

© 2012 Taylor & Francis

© 2012 Taylor & Francis

Price elasticity of supply

Elasticity of supply measures the responsiveness of supply to a change in price.

This relationship may be expressed as a formula:Percentage change in quantity supplied ÷ Percentage

change in priceWhere supply is inelastic it means

that supply cannot easily be changed, whereas elastic supply is more flexible.

© 2012 Taylor & Francis

© 2012 Taylor & Francis

Factors affecting price elasticity of supply

time periodavailability of

stocksspare capacityflexibility of

capacity / resource mobility

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Supply elasticity

How readily can a destination cope with sudden increases in demand?E.g. the Cole Classic Marathon

Swim, Bondi BeachHotels?Rubbish clearance?Cafes?Parking?Water?Snacks?Ice creams?Roads?

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Supply and costs

Leisure and tourism inputsLand

This includes natural resources such as minerals, and land itself.

LabourThis includes skilled and unskilled human effort.

CapitalThis includes buildings, machines and tools.

EnterpriseThis is the factor which brings together the other

factors of production to produce goods and services.

Fixed and variable factors

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Short-run costs

Short-run costsFixed costsVariable costsTotal costsAverage costsMarginal costs

Short runDiminishing returns

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Long run costs

Long runEconomies of scale

financialbuying and sellingmanagerial /

specializationtechnicaleconomies of

increased dimensionsrisk-bearing

Diseconomies of scale

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Short and long run costs

What happens to average short run costs of a hotel as occupancy falls?

How will the hotel respond to a long run fall in occupancy?

How do hotels benefit from economies of scale?

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Internal growthMergers and take-overs

vertical integrationhorizontal integrationconglomerate merger

How firms grow© 2012 Taylor & Francis

Intercontinental

What examples and benefits are there to this company ofHorizontal integration?Vertical integration?

Are there any potential dis-economies of scale?

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Social and private costs

Private costs of production are those costs which an organization has to pay for its inputs. They are also known as accounting costs since they appear in an organization’s accounts.

Social costs do not appear in an organization’s accounts and do not affect its profitability, although they may well affect the well-being of society at large.

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Private and social costs

What are the private costs?

What are the social costs?

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Review of key terms

Price elasticity of supplyresponsiveness of supply to a change in price.

Factors of productionland, labour, capital and enterprise.

Fixed factorone that cannot be varied in the short run.

Variable factorone that can be varied in the short run.

Average costtotal cost divided by output.

Marginal costthe cost of producing one extra unit of output.

© 2012 Taylor & Francis

Review of key terms

Vertical integrationmerger at different stage within same industry

Horizontal integrationmerger at same stage in same industry

Conglomerate mergermerger into different industry

Private costscosts which a firm has to pay

Social costscosts which result from output but which accrue to society

© 2012 Taylor & Francis