FS08EC2106_L13 - CHAPTER 13 The Costs of Production Economics-2106 PRINCIPLES OF Prof Byung-Cheol Kim ACTIVE LEARNING Brainstorming costs You run

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C H A P T E R The Costs of Production E conomics-2106 P R I N C I P L E S O F Prof. Byung-Cheol Kim 13
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You run General Motors. ± List 3 different costs you have. ± List 3 different business decisions that are affected by your costs. A C T I V E L E A R N I N G 1 Brainstorming costs 1
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In this chapter, look for the answers to these questions: ± What is a production function? What is marginal product? How are they related? ± What are the various costs, and how are they related to each other and to output? ± How are costs different in the short run vs. the long run? ± What are “economies of scale”? 2
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THE COSTS OF PRODUCTION 3 Total Revenue, Total Cost, Profit ± We assume that the firm’s goal is to maximize profit . Profit = Total revenue Total cost the amount a firm receives from the sale of its output the market value of the inputs a firm uses in production
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THE COSTS OF PRODUCTION 4 Costs: Explicit vs. Implicit ± Explicit costs require an outlay of money, e.g. , paying wages to workers. ± Implicit costs do not require a cash outlay, e.g. , the opportunity cost of the owner’s time. ± Remember one of the Ten Principles: The cost of something is what you give up to get it . ± This is true whether the costs are implicit or explicit. Both matter for firms’ decisions.
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THE COSTS OF PRODUCTION 5 Explicit vs. Implicit Costs: An Example I You need $100,000 to start your business. The loan interest rate is 5% and deposit interest rate is 3%. ± Case 1: borrow $100,000 ± explicit cost = $5000 interest on loan ± Case 2: use $40,000 of your savings, borrow the other $60,000 ± explicit cost = $3000 (5%) interest on the loan ± implicit cost = $1200 (3%) foregone interest you could have earned on your $40,000.
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THE COSTS OF PRODUCTION 6 Explicit vs. Implicit Costs: An Example II You paid off $200,000 on the house when you retire. The interest rate is APR 6%. The property tax and house insurance is sum to $200 / month. ± What is your cost of owing the house? ± explicit cost = $200 / month ± implicit cost = $1000 / month foregone interest you could have earned on your $200,000. ± Total cost = $1200 / month
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THE COSTS OF PRODUCTION 7 Economic Profit vs. Accounting Profit ± Accounting profit = total revenue minus total explicit costs ± Economic profit = total revenue minus total costs (including explicit and implicit costs) ± Accounting profit ignores implicit costs, so it’s higher than economic profit.
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The equilibrium rent on office space has just increased by $500/month. Compare the effects on accounting profit and economic profit if a. you rent your office space b. you own your office space A C T I V E L E A R N I N G 2 Economic profit vs. accounting profit 8
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The rent on office space increases $500/month. a. You rent your office space. Explicit costs increase $500/month. Accounting profit & economic profit each fall $500/month.
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This note was uploaded on 02/08/2011 for the course ECON 2106 taught by Professor Minjaesong during the Fall '06 term at Georgia Institute of Technology.

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FS08EC2106_L13 - CHAPTER 13 The Costs of Production Economics-2106 PRINCIPLES OF Prof Byung-Cheol Kim ACTIVE LEARNING Brainstorming costs You run

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