Chapter 9 Cost and Producer Choice

Chapter 9 Cost and Producer Choice - CHAPTER 9 Production...

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CHAPTER 9 Production Costs and Business Decisions The economist’s stock in trade—his tools—lies in his ability to and proclivity to think about all questions in terms of alternatives. The truth judgment of the moralist, which says that something is either wholly right or wholly wrong, is foreign to him. The win- list, yes-no discussion of politics is not within his purview. He does not recognize the either-or, the all-or-nothing situation as his own. His is not the world of the mutually exclusive. Instead, his is the world of adjustment, of coordinated conflict, of mutual gain. James M. Buchanan ost is pervasive in human action. Managers (as well as everyone else) are constantly forced to make choices, to do one thing and not another. Cost -- or more precisely, opportunity cost -- is the most highly valued opportunity not chosen. Although money is a frequently used measure of cost, it is not cost itself. Although we may not recognize it, cost also pervades our everyday thought and conversation. When we say “that course is difficult” or “the sermon seemed endless,” we are indicating the cost of activities. If the preacher’s extended commentary delayed the church picnic, the sermon was costly. Although complaints about excessive costs sometimes indicate an absolute limitation, more often they merely mean that the benefits of the activity are too small to justify the cost. Many people who “can’t afford” a vacation actually have the money but do not wish to spend it on travel, and most students who find writing research papers “impossible” are simply not willing to put forth the necessary effort. This chapter explores the meaning of cost in human behavior. We will begin by showing how seemingly irrational behavior can often be explained by the hidden costs of a choice. We will then develop the concept of marginal cost, which together with demand and the related concept of supply defines the limits of rational behavior, from personal activities like painting and fishing to business decisions like how much to produce. Inevitably, points made earlier will be reviewed and extended in this chapter. There is a cost in this repetition, but there is also some benefit in a few varied reiterations. We will use the cost analysis to make points that seem to defy common sense in business. For example, we will show that a firm should not necessarily seek to produce at the level at which the average cost of production is minimized. C
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Chapter 9 Production Costs and Business Decisions 2 Explicit and Implicit Costs Not all costs are obvious. It is not difficult to recognize an out-of-pocket expenditure— the monthly price you pay for a product or service. This is called an explicit cost. Explicit cost is the money expenditure required to obtain a resource, product, or service. For example, the price of your book is an explicit cost of taking a course in economics. Other costs are less immediately apparent. Hidden costs of the course might include the
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This note was uploaded on 04/10/2011 for the course BUSI 1100 taught by Professor Staff during the Spring '11 term at North Texas.

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Chapter 9 Cost and Producer Choice - CHAPTER 9 Production...

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