Theme 2: Sources of Supply In the same way that diminishing marginal utility of consuming a product (the more ice cream cones you consume, the less tasty they seem to get) explains why your...

Theme 2: Sources of Supply

In the same way that
diminishing marginal utility
of consuming a product (the more ice cream cones you consume, the less tasty they seem to get) explains why your willingness to pay for an item drops with more units consumed,
diminishing marginal productivity,
which we encountered in the last module, leads to increased costs and thus explains why prices must be higher at increasing levels of output, given the same production mix. Stated more proactively, suppliers will produce more in response to higher prices. These lines of reasoning explain the upward-sloping shape of the supply schedule, in which more items are offered for sale, the higher the price.
Though some managers do not use marginal cost, but the more intuitive
average cost
concept instead, we often find that along a given stretch of output levels, average and marginal costs are numerically close. Be that as it may, it will help you to understand the trajectory of costs, whether you are examining this relationship using the graphs or tables in the text. Examine them carefully. For some of you, this content might seem to be a bit more analytical than you bargained for, but you need the insights from these cost curves to explain market structure (i.e., competition, monopolistic competition, oligopoly, duopoly, and monopoly). From your knowledge of market structure, as you saw in Module 3, you can price your organization's product or service.
Recall also from the previous module a few key ideas about costs to keep in mind:

• 
  Average cost
  is total cost divided by each unit of output; but
  marginal cost
  measures the
  change in total cost divided by the change in output levels.


• Note the
  u-shaped
  nature of the cost curves, both short- and long-run.


• Note the more
  boat-shaped
  nature of the long-run cost curve; over a large portion of output, costs tend not to change very much.

Remember that short-run and long-run are not preset, pre-determined periods of time. Short-run signifies that all but one factor of production is fixed; in the long-run we can vary all factors of production. The short-run might be three months for one industry and for another three years. If you mentally translate the discussion about
long-run cost curves
into
planning curves, then you will have a better grasp of these concepts upon reading them. You will also appreciate the relevance of these insights to your course project organization. Remember, long-run does not refer to the distant future in economics.

Sensitivity of Supply

The elasticity equivalent when it comes to supply is the
input price elasticity of supply, which measures the extent to which the price of an input affects output. If wage (w) is the input price for labor, then the input price elasticity of supply is simply
%?q

_s

/%?w
where q_s
is quantity supplied and %? represents percentage change.