Economics 300 8 (SR Cost Structure)

Economics 300 8 (SR Cost Structure) - Chapter 7 The Cost...

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Chapter 7: The Cost Structure of the Firm The cost structure of a firm is the relationship between its costs and the level of output (quantity) it can produce and sell Economic theory is about the generic features of the firm’s cost structure, not specifics related to a particular firm The firm’s cost structure depends on the technology available (its production function) and the prices it pays for factors of production We assume a competitive firm that can obtain as much of any variable factor that it wants at a given price per unit
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The basic concept is economic cost Economic cost represents the opportunity cost of producing the firm’s output Opportunity cost is the value that the factors used by the firm would have earned in their best alternative uses Economic costs can differ from accounting and historical (sunk) costs Sunk costs (costs which the firm is stuck with regardless of anything it does) are not economic costs
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Examples of sunk costs The price you paid for a non-refundable concert ticket The money that has already been spent on planning the Seattle monorail The 1918 military fatalities (as of September 24 2005) that the US has suffered trying to set up democracy (or whatever objective) in Iraq
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