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PAM 200 Chapter 7

PAM 200 Chapter 7 - PAM 200 Chapter 7 Explicit costs costs...

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PAM 200 Chapter 7 Explicit costs: costs that involve a direct monetary outlay Implicit costs: costs that do not involve outlays of cash Opportunity cost: value of the next best alternative forgone when another alternative is chosen Includes all explicit and implicit costs associated with that alternative Opportunity costs differ because there are different opportunity costs for different decisions under different circumstances Economic costs- sum of firm’s explicit costs and implicit costs Accounting costs- total explicit costs that have been incurred in the past Does not include opportunity costs Sunk costs- costs that have already been incurred and cannot be recovered Nonsunk costs- costs that are incurred only if a particular decision is made (avoidable costs) Whether a cost is sunk or nonsunk depends on the decision that is being contemplated Cost-minimization problem: problem of finding the input combination that minimizes a firm’s total cost of producing a particular level of output Cost-minimizing firm: a firm that seeks to minimize the cost of producing a given amount of output Long-run: period of time that is long enough for firm to vary the quantities of all its inputs as much as it desires Short-run: period of time in which at least one of the firm’s input quantities cannot be changed (subject to constraints) Labor explicit cost if the firm hires workers in the open market and implicit if firm’s
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