Lecture9_10final

Lecture9_10final - Lecture 9 Chapter 7: The Cost of...

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Lecture 9 Chapter 7: The Cost of Production
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Last lecture Input allocation (L,K) Isoquant map Combinations of L and K producing a given output Q Now we look for optimal combination, so we need to introduce cost of inputs (note: consumer problem)
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Roadmap Measuring Cost: Which Costs Matter? Cost in the Short & Long Run Economies of scale Production with 2 Outputs: Economies of Scope Dynamic Changes in Costs: The Learning Curve Estimating and Predicting Cost
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Introduction Production technology measures the relationship between input and output together with prices of factor inputs, determine the firm’s cost of production Given the production technology, managers must choose how to produce
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Introduction The optimal, cost minimizing, level of inputs can be determined when introducing costs A firm’s costs depend on the rate of output and we will show how these costs are likely to change over time The characteristics of the firm’s production technology can affect costs in the long run and short run
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Measuring Cost: Which Costs Matter? For a firm to minimize costs, we must clarify what is meant by costs and how to measure them It is clear that if a firm has to rent equipment or buildings, the rent they pay is a cost What if a firm owns its own equipment or building? How are costs calculated?
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Measuring Cost: Which Costs Matter? Accountants = retrospective view of firms’ costs Economists = forward-looking view Accounting Cost Actual expenses plus depreciation charges for capital equipment Economic Cost Cost to a firm of utilizing economic resources in production, including opportunity cost E.g. foregone interests on capital stock E.g. manager could work as an employee
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Measuring Cost: Which Costs Matter? Economic costs distinguish between costs the firm can control and those it cannot Concept of opportunity cost plays an important role Opportunity cost Cost associated with opportunities that are foregone when a firm’s resources are not put to their highest-value use
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Opportunity Cost Example I A firm owns its own building and pays no rent for office space Does this mean the cost of office space is zero? The building could have been rented instead Foregone rent is the opportunity cost of using the building for production and should be included in the economic costs of doing business Example II A person starting their own business must take into account the opportunity cost of their time Could have worked elsewhere making a competitive salary
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Measuring Cost: Which Costs Matter? Although opportunity costs are hidden and should be taken into account, sunk costs should not Sunk Cost Expenditure that has been made and cannot be recovered Should not influence a firm’s future economic decisions
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Sunk Cost Firm buys a piece of equipment that cannot be converted to another use
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This note was uploaded on 05/24/2008 for the course ACC 203 taught by Professor Choi during the Spring '08 term at NYU.

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Lecture9_10final - Lecture 9 Chapter 7: The Cost of...

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