Lecture 16 - Announcements HW deadline has been extended...

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Announcements HW deadline has been extended until Wednesday at 11:45pm (next week’s HW will be due on Monday). 1 of 31
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COSTS! 2 of 31
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3 of 31 COSTS IN THE SHORT RUN fixed cost (FC) Any cost that does not depend on the firm’s level of output (Q). These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run. Examples: Rent on a store, property taxes. In business school lingo: FC’s are called “overhead costs”, and increasing the level of production is called “spreading out the overhead.”
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4 of 31 COSTS IN THE SHORT RUN variable cost A cost that depends on the level of production chosen (Q). Examples: Labor, lemons (for the lemonade stand) total cost ( TC ) Fixed costs plus variable costs.
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5 of 33 THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS short run the period over which the cost of one or more economic inputs is fixed. For example rent or capital stock. It is not a set time like one year or 6 months. It’s only in the SR that we make the FC/VC distinction. SHORT-RUN VERSUS LONG-RUN (Alternative definitions) long run the period over which all costs are variable. It is a time period where new plants can be built, or the firm can decide to get out of the business or exit the industry.
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Long Run vs. Short Run The definition of how long is SR and LR varies and is firm specific. Example: Miller Brewing SR decision : Do we produce more Genuine Draft, Lite or High Life? LR decision : Do we increase capacity of the plant, do we close it down, do we issue more bonded debt to expand? Miller’s long run time period for the plant discussed above is substantially longer (in terms of absolute time) than the long run for a dry cleaning business in Blacksburg. 6 of 31
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Short-Run Fixed Cost (Total and Average) of a Hypothetical Firm (1) Q (2) TFC (3) AFC ( TFC/Q ) 0 1 2 3 4 5 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $ - 1,000 500 333 250 200 7 of 31 COSTS IN THE SHORT RUN total fixed costs ( TFC ) or overhead The total of all costs that do not change with output, even if output is zero. Total Fixed Cost ( TFC ) FIXED COSTS Firms have no control over fixed costs in the short run. For this reason, fixed costs are sometimes called sunk costs.
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8 of 31 COSTS IN THE SHORT RUN sunk costs Another name for fixed costs in the short run because firms have no choice but to pay them. average fixed cost (
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Lecture 16 - Announcements HW deadline has been extended...

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