ECON2000_4_Cost_Analysis

ECON2000_4_Cost_Analysis - Cost Analysis Cost of Production...

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Cost Analysis Cost of Production
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Cost of Production 2 Topics to be Discussed Measuring Cost: Which Costs Matter? Cost in the Short Run Cost in the Long Run Long-Run Versus Short-Run Cost Curves
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Cost of Production 3 Topics to be Discussed Production with Two Outputs-- Economies of Scope Estimating and Predicting Cost
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Cost of Production 4 Introduction The production technology measures the relationship between input and output. Production technology, together with prices of factor inputs, determine the firm’s cost of production Given the production technology, managers must choose how to produce.
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Cost of Production 5 Introduction The optimal cost minimizing level of inputs can be determined. A firm’s costs depend on the rate of output and we will show how these costs are likely to change over time. The characteristics of the firm’s production technology can affect costs in the long run and short run.
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Cost of Production 6 Measuring Cost: Which Costs Matter? For a firm to minimize costs, we must clarify what is meant by cost and how to measure them It is clear that if a firm has to rent equipment or buildings, the rent they pay is a cost What if a firm owns its own equipment or building? How are costs calculated here?
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Cost of Production 7 Measuring Cost: Which Costs Matter? Accountants tend to take a retrospective view of firms costs, where as economists tend to take a forward-looking view 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
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Cost of Production 8 Measuring Cost: Which Costs Matter? Economic costs distinguish between costs the firm can control and those it cannot Concept of opportunity cost plays an important role Opportunity cost Cost associated with opportunities that are foregone when a firm’s resources are not put to their highest-value use.
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Cost of Production 9 Opportunity Cost 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 Foregone rent is the opportunity cost of using the building for production and should be included in economic costs of doing business
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Cost of Production 10 Opportunity Cost A person starting their own business must take into account the opportunity cost of their time Could have worked elsewhere making a competitive salary Accountants and economists often treat depreciation differently as well
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Cost of Production 11 Measuring Cost: Which Costs Matter? Although opportunity costs are hidden
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ECON2000_4_Cost_Analysis - Cost Analysis Cost of Production...

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