3-5-08 - 5 March 2008 READ CHAPTER 8 Short Run Cost...

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5 March, 2008 READ CHAPTER 8!!! Short Run Cost Concepts Fixed Cost (F) – expenses that do not vary with output – land, plant size, heavy machinery – this is opportunity cost – the cost of not renting this stuff out to someone else. F = r*K (where r is the rental rate and K is capital) Variable Cost (VC) – the production expense that does change with output – expense of all of the variable inputs into the production process – cost of labor and materials. In the very simple model that we have developed. VC = w * L (where w is the wage rate and L is labor) Total Cost (C) C = VC + F = w*L + r*K Marginal Cost – the cost of production an additional unit of output – the change in cost when one additional unit of output is produced. MC = ΔC/ΔQ = ΔVC/ΔQ Most of the time we do not care about aggregate cost – we care about average cost or per unit cost. Average fixed cost (AFC) – fixed cost per unit of output = F/Q Average variable cost (AVC) – variable cost per unit of output – VC/Q Average total cost (ATC) – total cost per unit of output – C/Q
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