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Theme5_couts_A08AN

# Theme5_couts_A08AN - Costs 2 Introduction Opportunity cost...

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Costs

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2 Introduction Opportunity cost Production costs : Short run Long run
3 A business decision You are contemplating starting your own business. Your estimate: revenue of \$60,000 per year Estimated costs (by accountant): \$25,000 per year What would your profit be? Should you start this business?

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4 Opportunity cost How would your answer change if you were currently employed at \$40,000 per year? Opportunity cost : the value of the best alternative use of a resource. Accounting π = Revenue – Accounting Costs Economic π = Revenue – Economic costs Accounting costs + Opportunity cost
5 Short-run costs In the short run: K is fixed and L is variable Fixed costs (F) : independent of output (=cost of K) Variable costs (VC): varies with output Total Cost : C = F + VC

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6 Average cost (AC) AC = C/q = F/q + VC/q = AFC + AVC Interpretation:
7 MC = ∆C/∆q (discrete case) = C’ (continuous case) Interpretation: Marginal cost (MC)

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8 Output F VC C MC AFC AVC AC 0 50 0 ___ n/a n/a n/a n/a 1 50 50 ___ ___ ___ ___ ___ 2 50 78 ___ ___ ___ ___ ___ 3 50 98 ___ ___ ___ ___ ___ 4 50 112 ___ ___ ___ ___ ___ 5 50 130 ___ ___ ___ ___ ___ 6 50 150 ___ ___ ___ ___ ___ 7 50 175 ___ ___ ___ ___ ___ 8 50 204 ___ ___ ___ ___ ___ 9 50 242 ___ ___ ___ ___ ___ 10 50 300 ___ ___ ___ ___ ___ 11 50 385 ___ ___ ___ ___ ___
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