Introduction

After you have worked through this section of the learning unit, you should be able to:

  • identify factors that have an impact on the cost of production and describe what happens to the supply schedule if the cost of production changes

Things like land, capital and labour are needed to make products. Businesses pay for these things (which are called the factors of production), and this payment forms part of the cost of production.

For example, the labour used in producing something is paid for through wages, and wages are calculated as part of a business’s cost of production. A business will only be willing to supply a product to the market if it can cover its cost of production.

The following are examples of the cost of production for fried chicken suppliers:

•    the price of chickens bought from chicken farmers
•    the price of the oil used for frying
•    the wages of employees
•    the cost of electricity used to run the ovens
•    the cost of rent for the building
•    the interest the supplier pays on capital
•    the profit the supplier makes

Any increases in the price of inputs will affect a business’s cost of production. For example, an increase in the wages that fried chicken suppliers pay for labour will increase the cost of producing fried chicken pieces. Fried chicken suppliers will therefore have to charge a higher price to supply the same quantity of fried chicken pieces to the market as they did before.

Activity

Study the table below, which represents the supply schedule for cold drinks before and after an increase in the price of inputs. Then answer the following questions:

Increase in cost of production

Price of cold drinks (rand) Quantity of cold drinks supplied (per week) Quantity of cold drinks supplied after the cost of production increases (per week)
7 140 130
6 120 110
5 100 90
4 80 70
3 60 50
2 40 30
1 20 10
  1. How many cold drinks are suppliers prepared to supply at a price of R6 before the increase in costs?
  2. How many cold drinks are suppliers prepared to supply at a price of R6 after the increase in costs?
  3. How many cold drinks are suppliers prepared to supply at a price of R2 before the increase in costs?
  4. How many cold drinks are suppliers prepared to supply at a price of R2 after the increase in costs?
  5. Are the suppliers prepared to supply more or fewer cold drinks at every price after an increase in cost?
Click to see the answer
  1. 120
  2. 110
  3. 40
  4. 30
  5. fewer