lecture10 - Key issues 1. measuring costs 2. short-run cost...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Key issues 1. measuring costs 2. short-run cost minimization 3. long-run cost minimization 4. costs are lower in long run 5. costs of producing multiple goods simultaneously
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Two-step procedure to choose technology 1. pick all technologically efficient production processes 2. from these technologically efficient production processes, pick the one that is economically efficient (minimizes cost)
Background image of page 2
Two reasons to study costs 1. understanding relationship between costs of inputs and production helps us determine least costly way to produce 2. relationship between output and costs determines nature of an industry how many firms are in the industry how high price is relative to cost
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Business vs. economic costs business costs : only explicit costs (out of pocket) economic costs: explicit cost + implicit cost = opportunity cost opportunity cost value of best alternative use of the resource classic example: "There's no such thing as a free lunch" “What have you given up to study opportunity costs”
Background image of page 4
Cost of running your own firm explicit cost : $40,000 per year (rent, materials, wage payments) instead of paying yourself a salary, you keep any profit at year's end your labor opportunity cost = $25,000/year you could have earned working for another firm business cost = $40,000 economic cost = $65,000 = $40,000 + $25,000
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
“It’s exactly this sort of attitude toward work, Orville, that has kept you from owning your own business.”
Background image of page 6
Capital costs capital is a durable good: a product that is usable for years capital may be rented or purchased
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
If capital is rented rental payment is the opportunity cost using the rental rate avoids 2 measurement problems don't have to worry how to allocate the initial purchase cost over time any adjustment in the cost of capital over time is reflected in the rental rate
Background image of page 8
If capital is purchased firm's bookkeeper may expense cost by recording purchase price when it's made, or amortize cost by spreading it over life of capital according to IRS's arbitrary rules economists amortize capital cost based on its opportunity cost at each moment of time: amount that firm could charge others to rent capital thus, economists always use rental rate
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Depreciate a business vehicle Toyota Land Cruiser (sports utility vehicle) and Cadillac Seville (car) both cost $45,000 tax law let’s you depreciate Land Cruiser in 6 years vs. 23 for Seville after 5 years depreciated $42,408 for Land Cruiser vs. $14,460 for Seville “reason” Land Cruiser weighs more than 6,000 pounds and Seville doesn't Congress uses 6,000 pounds as a criterion to distinguish between trucks and cars
Background image of page 10
fixed cost ( F ): production expense that does not vary with output variable cost ( VC
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/01/2008 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.

Page1 / 76

lecture10 - Key issues 1. measuring costs 2. short-run cost...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online