0:12
Okay, we have a few quick things to clean up in this module.
Regarding the supply curve.
And then we will finish up with a flourish with an overview of
the functional area and business call operations and supply chain management.
Just as there is
a law of demand that we learned about in the last lesson.
There is also a law of supply.
In this key definition,
when the price of a good increases the quantity of that good supply will increase.
This means of course that the supply curve is upward sloping.
By the same token,
just as there is a price elasticity of demand.
There is also a price elasticity of supply.
And here's what I think. I think that
knowing what you now know about the price elasticity of
demand you should be able to write down the formula for the price elasticity of supply.
Which measures, the responsiveness of supply to price changes.
So how about proving me right by pausing the presentation
now and writing down the formula for the price elasticity of
supply on a piece of paper or your computer.
1:41
OK here it is. Did you get it right?
In this key formula,
the price elasticity of supply is simply the percent change in
quantity supply divided by the percent change in price.
Okay, let's quickly go
over the determinants of the price elasticity of supply.
You may remember from our last lesson that the price elasticity of
demand is determined by factors like the number of substitutes for the product,
the degree of substitutibility,
and how broad or narrow the product definition is.
By analogy, the price elasticity of supply is determined
by factors such as these: one, factor mobility.
The more mobile resources are to move into an industry,
the more elastic supply will be.
Two, production speed.
The longer it takes to produce a product,
the less elastic supply will be.
For example, manufacturing industries are usually quicker to
respond in agriculture and therefore more price elastic.
Three, inventory and excess capacity.
The more inventory on hand on both raw materials and finished goods,
and the more excess capacity available to bring into production,
the more price elastic is supply.
And four, of course time must be considered.
As with the price elasticity of demand,
the price elasticity of supply will be more elastic in
the longer run as this allows more adjustments to take place.
3:38
Okay, that's a wrap on production theory.
Let's finish up now with an overview of one of
the most important functional areas of a business education,
and also one of the most important functions of
the firm: operations and supply chain management.
This function all begins with aggregate planning.
Big questions here include: what should be
the quantity and the mix of the products produced,
and how many employees are you going to need to deliver those products?
Next, there is inventory management and this is a story not just
about how much of the final product your business should hold in inventory,
it's also about the appropriate inventory levels
for the production inputs you will need to produce your product.
It's always a balancing act and,
as you will learn in your companion macro economics course,
when businesses accumulate too many inventories
collectively because of over forecasting demand,
that can sometimes trigger a recession in the broader economy.
As for the third element in our big question roadmap,
there is the challenge of production management.
And one of the big questions here is this: what is
your philosophy for moving product within the production facility?
For example, are you going to push your product through
the factory using a tool like materials, requirement, planning,
or so-called MRP, or are you going to pull a product using
a system like just in time made famous by Japanese automobile manufacturers.
And by the way,
another big question here has to do with how your firm,
will convert the forecast demand for your product,
that was made by your economics team,
into an actual requirement schedule for
the components sub-assemblies and raw materials needed for production.
Yet another balancing act.
Finally, there is the task of supply chain management itself.
The really big question here revolves around how you manage the flow of
inputs and outputs as an integrated system in your network,
suppliers, manufacturers, distributors, and customers.
Of course, within these big questions.
There are some only slightly smaller questions as well.
For starters, the operations manager has to deal with operations schedule.
For example, how do you sequence production activities on the shop floor, and,
should you meet peak demand with things like overtime
or perhaps a night shift or subcontract?
In addition, there is project scheduling.
How do you build a large and very complex project most efficiently?
Third, there are the choices surrounding facilities layout and location.
Where do you locate your new facilities relative to
existing facilities and what is the most efficient layout?
Finally, there are the issues of quality and reliability.
How should quality be defined and achieved,
and how does reliability differ from quality.
If you don't think these issues are important,
just remember that the next time your computer, or your phone,
or your car goes down,
and you are left stranded in digital space or on the highway.
At any rate, it should be clear that at least in
the field of operations and supply chain management,
the issues are highly technical.
So, if you are inclined towards engineering, or math,
or physics, this area of business may just be the perfect niche for you.
In the meantime, that's a wrap for this lesson,
as well as the mysteries of supply and demand.
In the next lesson we will move from the realms of marketing and operations management,
into the exciting domain of management strategy as
we begin to explore various different forms of market competition.
So take a breather now, and when you are ready,
I'll see you in lesson five.
University of California Irvine. I am Peter Navarro.
Dr. Peter NavarroProfessor
