chp7 - ECON 300B Lei Intermediate Microeconomics Winter...

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Unformatted text preview: ECON 300B Lei Intermediate Microeconomics Winter 2011 1 Chapter 7 Chapter 7 Chapter 7 Chapter 7 - Costs Costs Costs Costs Technical efficiency vs. economical efficiency Technical efficiency vs. economical efficiency Technical efficiency vs. economical efficiency Technical efficiency vs. economical efficiency i. _______________________________efficiency ~ Given the technology and inputs, the output is maximum level that can be produced. ii. _______________________________ efficiency ~ Given the technology and target output, the firm chooses input levels to minimize cost of production. In this chapter, we will look at how a firm achieves both technological efficiency and economical efficiency. Accounting cost vs. economic cost (opportunity cost) Accounting cost vs. economic cost (opportunity cost) Accounting cost vs. economic cost (opportunity cost) Accounting cost vs. economic cost (opportunity cost) i. _______________________________ costs ~ a firm’s explicit, out-of-pocket payment for inputs ii. _______________________________ costs ~ all relevant costs, explicit and implicit. Opportunity cost is the value of next best alternative of an economic activity Costs of production: Costs of production: Costs of production: Costs of production: i. _______________________________ for labor (w) ii. _______________________________ for capital (r) Variability of costs: Variability of costs: Variability of costs: Variability of costs: i. _______________________________ cost ~ production expense that cannot be recovered ii. _______________________________ cost (F) ~ production expense that does not vary with output level; cost for fixed input(s) Capital (K) is assumed to be fixed in the short run, the short-run fixed cost is g = G¡ ¢ Fixed cost is not sunk because it is recovered in the long run. iii. _______________________________ cost (VC) ~ production expense that changes with output level; cost for variable input(s) Labor (L) is assumed to be variable in the short run, the short-run variable cost is £¤(¥) = ¦§(¥) where § = §(¥) can be derived from taking inverse of the production function ¥ = ¨(§,¡ ¢ ) . ECON 300B Lei Intermediate Microeconomics Winter 2011 2 7 short 7 short 7 short 7 short-run measures of cost: run measures of cost: run measures of cost: run measures of cost: i. fixed cost (F) ii. variable cost (VC) iii. _______________________________ cost (C) ~ sum of costs – variable and fixed costs: g(G) = ¡ + ¢g(G) iv. _______________________________ cost (MC) ~ cost of producing an additional unit of output: £g(G) = ∆g(G) ∆G → ¤g(G) ¤G as ∆G → 0 Since ¡ is constant/fixed in the short-run, £g(G) = ¤ ¤G ¥¡ + ¢g(G)¦ = ¤¢g(G) ¤G Thus, £g can also be interpreted as “marginal variable cost”....
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