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Unformatted text preview: Chapter 7 Costs Main Topics: 1. Measuring Costs: Economists count both explicit costs and implicit (opportunity) costs 2. Short-run costs : To minimize its costs in the short run, a firm adjusts its variable factors (such as labor), but it cannot adjust its fixed factors (such as capital) 3. Long- run costs: In the long run, a firm adjusts all its inputs because usually all inputs are variable 4. Lower costs in the long run: Long-run cost is as low as or lower than short-run cost because the firm has more flexibility in the long run, technological progress occurs, and workers and managers learn from experience 5. Cost of producing multiple goods: If the firm produces several goods simultaneously, the cost of each may depend on the quantity of all the goods produced 7.1 Measuring Costs • Explicit costs are a firm’s direct, out-of-pocket payments for inputs to its production process during a given time period such as a year • Implicit costs include the value of the working time of the firm’s owner and the value of other resources used but not purchased in a given period • Economic cost or opportunity cost: the value of the best alternative use of a resource • Durable good: a product that is usable for years • Two problems that arise in measuring the cost of capital: 1. How to allocate the initial purchase cost over time 2. Is what to do if the value of the capital changes over time • Sunk cost: an expenditure that cannot be recovered 7.2 Short-Run Costs • Fixed cost (F): a production expense that does not vary with output • Fixed costs include the cost of inputs that the firm cannot practically adjust in the short run • Variable cost (VC): a production expense that changes with the quantity of output produced • The variable cost of the variable inputs-the inputs the firm can adjust to alter its output level • Cost (total cost, C): the sum of a firm’s variable cost and fixed cost: C=VC + F • Marginal cost (MC): the amount by which a firm’s cost changes if the firm produces one more unit of output • Average fixed cost (AFC): the fixed cost divided by the units of output produced: AFC= F/q • The average fixed cost falls as output rises because the fixed cost is spread over more units •...
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This note was uploaded on 05/03/2009 for the course PAM 200 taught by Professor Unur during the Spring '08 term at Cornell University (Engineering School).
- Spring '08