Lecture 1
Procurement and Supply Management activities are driven by 4 complementary
perspectives/factors:
1. Society/Government: determine regulations
2. Markets: determine prices for goods and services
3. Suppliers: determine alternatives available for procurement
4. Internal factors: determine needs and resources available
Social surplus: a measure for welfare (governments want to maximaze)
- Total benefits - total cost
Potential Pareto improvement: A greater increase in benefits than cost or a larger reduction in
cost than in benefits
Consumer surplus: Total benefits – total expenditure
Producer surplus: Total revenues – total cost
Social surplus is
1. Total benefits (B) – Total cost (C)
2. Consumer surplus (CS) + producer surplus (PS)
Total benefits that market attach to the product: sum of maximum willingness to pay from all the
consumers who can buy the product
Total benefits
Total cost: sum of total cost of all consumers who can buy the product
Total cost
,Social surplus: difference between total benefits and total cost
Consumer surplus: total benefits - total expenditure
Producer surplus: total revenues - total cost
Social surplus = also consumer surplus + producer surplus
Loss of social surplus if the price goes up
WATCH OUT: not the red square
,Loss of social welfare if price goes down
WATCH OUT: not an increase of the red square
Marginal willingness to pay defines the (inverse) demand function
If the price is fixed on 300 and the Q is quantity demanded
Change in social surplus if cost changed from €300 to €500
, Change in social surplus if cost changed from €300 to €100
If the airline were a monopolist, which fee would they charge?
mr=mc
mc = 300
mr=
revenue = p*q
(1000-q)*q
1000q - q2
mr (is r’) 1000- 2q
mr=mc -> 1000-2q = 300
q = 350
p = 1000-q
1000-350 = 650
How high is the profit for the monopolist?
Procurement and Supply Management activities are driven by 4 complementary
perspectives/factors:
1. Society/Government: determine regulations
2. Markets: determine prices for goods and services
3. Suppliers: determine alternatives available for procurement
4. Internal factors: determine needs and resources available
Social surplus: a measure for welfare (governments want to maximaze)
- Total benefits - total cost
Potential Pareto improvement: A greater increase in benefits than cost or a larger reduction in
cost than in benefits
Consumer surplus: Total benefits – total expenditure
Producer surplus: Total revenues – total cost
Social surplus is
1. Total benefits (B) – Total cost (C)
2. Consumer surplus (CS) + producer surplus (PS)
Total benefits that market attach to the product: sum of maximum willingness to pay from all the
consumers who can buy the product
Total benefits
Total cost: sum of total cost of all consumers who can buy the product
Total cost
,Social surplus: difference between total benefits and total cost
Consumer surplus: total benefits - total expenditure
Producer surplus: total revenues - total cost
Social surplus = also consumer surplus + producer surplus
Loss of social surplus if the price goes up
WATCH OUT: not the red square
,Loss of social welfare if price goes down
WATCH OUT: not an increase of the red square
Marginal willingness to pay defines the (inverse) demand function
If the price is fixed on 300 and the Q is quantity demanded
Change in social surplus if cost changed from €300 to €500
, Change in social surplus if cost changed from €300 to €100
If the airline were a monopolist, which fee would they charge?
mr=mc
mc = 300
mr=
revenue = p*q
(1000-q)*q
1000q - q2
mr (is r’) 1000- 2q
mr=mc -> 1000-2q = 300
q = 350
p = 1000-q
1000-350 = 650
How high is the profit for the monopolist?
