ch07 ppt notes

ch07 ppt notes - Chapter Seven Costs and Cost Minimization...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Costs and Cost Minimization Chapter Seven Chapter Seven
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Chapter Seven Overview 1. Introduction: Burke Mills 1. What are Costs? 1. Long Run Cost Minimization The constraint minimization problem Comparative statics Input demands 1. Short Run Cost Minimization Chapter Seven
Background image of page 2
3 The relevant concept of cost is opportunity cost : the value of a resource in its best alternative use. The only alternative we consider is the best alternative Chapter Seven Opportunity Cost
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Chapter Seven Example: Investing $50M - $50M to invest with four alternatives: 1.) If invest now in CD-ROM factory, expected revenues are $100M 2.) If wait a year, expected revenues from CD-ROM investment are 75M 3.) If build new technology plant now , 50% chance that revenues are $0, 50% chance yields $150M. 4.) If wait a year, will know whether revenues are $0 or $150M. Opportunity Cost
Background image of page 4
5 (3) yields .5($0) + .5($150M) = $75M (4) yields .5($75M) + .5($150M)=$112.5M Chapter Seven What is the opportunity cost of investing in CD-ROM plant now ? Hence, (4) is the best alternative and the opportunity cost is $112.5M Costs depend on the decision being made Example: Opportunity Cost of Steel Purchase steel for $1M. Since then, price has gone up so that it is worth $1.2M Opportunity Cost
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 What is the opportunity cost of manufacturing the cars?  $1.2M  Costs depend on the perspective we take  Opportunity costs often are implicit Chapter Seven Opportunity Cost 1) Manufacture 2000 automobiles 2) Resell the steel
Background image of page 6
7 Backflush if opportunity cost of holding chips rises Accounting costs may be lower or higher than economic costs Chapter Seven Opportunity Cost – DRAM Chips Both a long term and a spot market for DRAM chips exist Opportunity cost equals the current spot price, not the historical contract price
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 Sunk Costs are costs that must be incurred no matter what the decision. These costs are not part of opportunity costs. Chapter Seven
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/18/2010 for the course ECO 300 taught by Professor Zhao during the Spring '10 term at SUNY Albany.

Page1 / 34

ch07 ppt notes - Chapter Seven Costs and Cost Minimization...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online