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Contents
Overview - Benefits & Limitations Cost Curve Analysis - Overview - Cost Curves Supply Curve Analysis - 10-Step Approach - Example 4 6 7 8 9 11 12 24
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representation of the Law of Supplyand provides insight into competitive pricing dynamics
Supply Curve Analysis Overview
The Industry Supply Curve is graphic representation of the Law of Supply, which states that there is a direct relationship between price and quantity supplied. The Supply Curve slopes upward to the right. The slope tells us that the quantity supplied varies directly with price. Analyzing the Industry Supply Curve also provides insight into competitive pricing dynamics and helps with scenario-based game analysis. The example provided at the end of this document illustrate the impact to price and competition as one player decides to change its production capacity. INDUSTRY SUPPLY CURVE
UNIT PRODUCTION COST
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Segment 1 Segment 2 Segment 3 Segment 4 Seg 5 S6
CUMULATIVE PRODUCTION
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Formulation and understanding of Industry Supply Curves is dependent on Cost Curve Analysis
Cost Curve Analysis Overview Cost Curves are used to illustrate the relationship between production costs and production capacity
KEY DEFINITIONS
Total Cost of Production (TC) This includes all costs associated with the delivery of value to the customer; e.g. transportation, installation, guaranteed service, etc. These costs can broken down into Fixed Costs (FC) and Variable Costs (VC) Average Total Cost = (FC + VC) / quantity produced Fixed Costs (FC) These costs are not tied to level of goods produced; e.g. plant maintenance, overhead, utilities, land, leases, insurance Average Fixed Cost (AFC) = FC / quantity produced
KEY TRENDS/CONCEPTS
As production increases, the AFC per unit begins to fall as fixed costs are spread across an increasing number of units As production increases, the AVC will initially decrease as increase in production leads to economies of scale (e.g. bulk discounts in raw materials)however, after a certain a point, the AVC will begin to increase as production experiences diseconomies of scale (e.g. more employees, trucks) experience economies of scale, but will eventually increase as diseconomies of scale kick in Curves
As a result, the ATC THIS IS A PARTIAL PREVIEW per unit falls initially as companies
Variable Costs (VC) These costs are dependent directly on the quantity of good products; e.g. raw materials, wages/salaries, packaging, shipping Average Variable Cost (AVC) = VC / quantity produced
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Two important points to identify on the Cost Curves are the Breakeven Point and Shutdown Point
Cost Curves MC, Breakeven Point, Shutdown Point
Marginal Cost (MC) the cost of producing 1 unit
ATC
AVC
Breakeven Point is the value when MC = minimum ATC At this point, the company makes no money on the produced goods
MC
Breakeven Point
Shutdown Point is the value when MC = minimum AVC At this point, the company is operating at a loss and is indifferent from continued operations or shutting down temporarily
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PRODUCTION QUANTITY
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Step 5 Determine the total production cost for each competitor group
Overview
Use your companys detailed cost data to develop a cost model Perform high-level activity based costing (ABC)to do this, map your companys product and delivery processes; and assign relevant costs to each Assess the production differences experienced by the representative firms in other segmentsthis is done by estimating how the production process of each representative firm may differ from your own processes (e.g. machine technology, labor productivity, plant site location, delivery costs, warehousing costs, etc.) The production costs of each competitor group should be assimilated based on the totalTHIS IS A PARTIAL PREVIEW production cost components (e.g. labor, raw materials, overhead, delivery) for that product or service In other words, sum up all such Component Costs, where Component Cost = (Cost of Input) x (Quantity of Input)
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Define the industry and market boundaries. Determine the industry structure. Group producers into segments. Select a representative producer within each segment. Determine the total lifetime production cost for each representative producer. Separate the fixed costs and variable costs for each segments representative producer. Calculate the points of the representative firms Cost Curves. Determine the total production capacity of each segment. Plot the Industry Supply Curve. Verify the resulting Industry Supply Curve.
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You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
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THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
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Market Demand
Overcapacity
ATC AVC
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Segment 1 Segment 2 Segment 3 Seg 4 Segment 5 S6
CUMULATIVE PRODUCTION
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END OF PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/
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