14. Cost.pdf - Costs Cost minimization Comparative statics Short-run cost minimisation Economics Lecture 14 Firm theory Costs and Cost Minimisation Anna

14. Cost.pdf - Costs Cost minimization Comparative statics...

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Costs Cost minimization Comparative statics Short-run cost minimisation Economics - Lecture 14 Firm theory Costs and Cost Minimisation Anna D’Ambrosio Polytechnic of Turin Chapter 7, Besanko & Braeutigam, Microeconomics , 4th Edition 1 / 36
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Costs Cost minimization Comparative statics Short-run cost minimisation Costs and Cost Minimisation 1 Costs 2 Cost minimization 3 Comparative statics 4 Short-run cost minimisation 2 / 36
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Costs Cost minimization Comparative statics Short-run cost minimisation Which costs matter? Firm’s purpose: minimize costs But which costs? To an economist, the cost is the value of sacrificed opportunities If a firm has to rent equipment or buildings, the rent paid is a cost What if a firm owns its own equipment or building? Some costs involve direct economic outlays, other don’t: Explicit costs involve direct economic outlays Implicit costs do not involve direct economic outlays, but rather opportunity costs 3 / 36
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Costs Cost minimization Comparative statics Short-run cost minimisation Opportunity cost (recap) Consider a decision maker facing a choice among a set of mutually exclusive alternatives, each of which entails a particular monetary payoff. The opportunity cost of a particular alternative is the payoff associated with the best of the alternatives that are not chosen . An Example: A firm owns its own building and pays no rent for office space Does this mean the cost of office space is zero? The building could have been rented instead The opportunity cost of using the building for production is the foregone rent and should be included in the economic costs of doing business 4 / 36
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Costs Cost minimization Comparative statics Short-run cost minimisation Opportunity cost The opportunity cots of using the services of an input is what the firm’s owners would save or gain by NOT using these services. Two ways a firm can “not use” the services of an input: Refrain from buying the input (i.e. saving an amount equal to the market price of the input) Resell unused services of the input in the open market (gaining an amount equal to the market price of the input) In both cases, the opportunity cost of the input services is the current market price of those services The notion of opportunity cost is forward looking : Different opportunity costs for different decisions under different circumstances Alternative uses are priced at the time of the decision In some cases, the payoff may become so large that the optimal course of action is to choose the best of the alternatives... 5 / 36
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Costs Cost minimization Comparative statics Short-run cost minimisation Economic vs. Accounting costs Accountants tend to take a retrospective view of firms’ costs (to ensure an objective verifiability) whereas economists tend to take a forward-looking view (relevant to decisions taken at a specific point in time) Accounting Cost: Actual expenses plus depreciation charges for capital equipment Economic Cost: Cost to a firm of utilizing economic resources in production, including opportunity cost 6 / 36
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