Externalitites and Public goods

Externalitites and Public goods - Production and Costs...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Production and Costs Primary firm motive: maximize profits! Profit = Revenue – Cost I. Measurement of Costs A. Explicit Costs 1. Purchased or rented factors: e.g. $110 worth of textiles material = $110 cost. 2. Labor costs: wages or salary, plus any benefits, payroll taxes, unemployment insurance, worker’s comp, costs in meeting OSHA requirements, etc. 3. Borrowed money: the cost of borrowed money is the interest that must be paid. B. Implicit Costs: the opportunity cost of non-purchased inputs. 1. A firm’s own money Example: A firm uses $100,000 of its own money in a low-risk venture that returns $106,000 after one year. a. For the accountant, the firm would incur no costs (because it used its own funds), and so the profit would be $6,000. b. An economist would look at the opportunity cost. If the interest rate (low- risk) is 3%, then the firm could have put its money in the bank and earned $3,000, so the opportunity cost is $3,000 and the profit is $3,000. 2. Durable assets: depreciate over time Example: Suppose a firm spends $32,000 on a truck that is expected to last 8 years (for ease of explanation, assume the truck would have no salvage value at the end of the 8 years). a. An accountant chooses some depreciation method (since this is not an accounting course, we will pick the simplest method); straight-line depreciation. The accountant depreciates the truck evenly over the 8 years. In other words there is a cost of $4,000 each year.
Background image of page 1

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

View Full DocumentRight Arrow Icon
b. An economist will want to know the market value of the truck at the end of each year. If after 1 year, the market value of the truck is $25,000 then the implicit cost is $7,000. 3.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/13/2007 for the course ECON 2010 taught by Professor Mertens,wi during the Fall '07 term at Colorado.

Page1 / 9

Externalitites and Public goods - Production and Costs...

This preview shows document pages 1 - 3. Sign up to view the full document.

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