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Chapter 5 - Production CostsPPT

# Chapter 5 - Production CostsPPT - Chapter 5 Production...

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Chapter 5 Production Costs

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Firm Input markets Labor (L) Wage Rate (W) Capital (K) User Cost (r) Output market Output (q) Price (P) Total Revenue = P × q Total Cost = W × L + r × K Total Profit = P × q (W × L + r × K)
User Cost of capital is the cost of using capital The cost is calculated per production period (say, a year): Interest Insurance Rent Depreciation Etc.

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Two Runs Short Run: A period of time over which the amounts of some inputs are fixed. Long Run: A period of time over which the amounts of all inputs are variable. We assume: K is the fixed input L is the variable input W × L = VC r × K = FC TC = VC + FC
Classification of Costs Explicit Cost = Wages + Interest + Rent + Insurance + ∙∙∙ Implicit Cost = Depreciation of Capital + Normal Profit Accounting Cost = Explicit Cost + Depreciation Economic Cost = Explicit Cost + Depreciation + Normal Profit Depreciation of Capital = Reduction in the market value of capital due to use. Normal Profit = Opportunity cost of resources provided by the owners of the firm.

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Explicit Cost Implicit Cost Wages, Interest, Rent, etc. Depreciation Normal Profit Economic Cost Accounting Cost
Borrow \$1m. Interest payments = \$90,000

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