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Ch 9 - The Analysis of Costs

Ch 9 - The Analysis of Costs - CHAPTER 9 THE ANALYSIS OF...

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CHAPTER 9: THE ANALYSIS OF COSTS Increasing competitive pressures, changing technology & customer demand have made it harder for firms to achieve high profit margins by raising their prices. - cost management, restructuring, downsizing - outsourcing & relocation of manufacturing facilities to low-wage countries - mergers, consolidations … Choosing Output: The Concept of Economic Cost: - Opportunity Cost - the cost of inputs to a firm are their values in their most valuable alternatives uses - these costs together with the firm’s production function (which indicates how much of each input is required to produce various amounts of the product), determine the cost of producing the product called opportunity cost doctrine - Opp Cost may not = the Historical cost ex firm owns its own building & pays no rent for office space, does this mean the cost of office space is zero? - Historical Cost – the amount the firm actually paid for a particular input - emphasis on the fact that historical costs can be misleading, don’t represent the actual present value of the input Accounting vs Economic Cost: - Accountant’s Notion: - involves only the firm’s explicit costs - Explicit costs: - include the ordinary items that an accountant would include as the firms expenses - eg payroll, payments for raw materials - Economist’s Notion: - includes explicit & implicit costs - Implicit costs - include opportunity costs of resources owned & used by the firm’s owner - arise because the opportunity cost doctrine must be applied to the inputs supplied by the owner - eg an owners time put into the business should be counted at the value at which he would have been paid had he worked for another company - Economist cost – the sum of explicit cost plus implicit cost COSTS REVENUES Technology & costs of hiring factors of production TC curves (short & long run) AC (short & long run) MC Demand curve AR MR CHECK: produce in SR? close down in LR? Choose output level
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Economic vs Accounting Profit: Fixed & Variable Costs: - Fixed Cost – cost that doesn’t depend on the firm’s level of output. These costs are incurred even if the firm is producing nothing & cannot be recovered - Variable Cost – cost that depends on the level of production chosen Cost Function: - can be determined because we know the cost of producing each level of output - shows various relationships between its costs & output rate - influenced by production function & input prices Short-Run vs Long Run Decisions: Short Run: - a period of time so short that the firm cannot change the quantity of some of its inputs in
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