Topic_05_Cost

Topic_05_Cost - Topic 05 05 Costs Of Production COMM 295...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Topic 05 Costs Of Production OMM 295 COMM 295 r. Ratna K. Shrestha Dr. Ratna K. Shrestha
Background image of page 1

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

View Full DocumentRight Arrow Icon
ost Function Cost Function roduction technology together with prices z Production technology, together with prices of factor inputs, determines the firm’s cost of producing a desired level of output. z In a production process, a manager’s objective is to choose the levels of inputs (such as K and L) to minimize the cost of producing a desired level of output (with a given production technology). 2
Background image of page 2
osts of Production Costs of Production ± A firm’s costs include Explicit Costs and Implicit Costs : ² Explicit Costs involve a direct money outlay for factors of production. For example if you hire a worker and pay his/her wage that is an xplicit cost explicit cost. ² Implicit Costs do not involve a direct money utlay For example if you work for your outlay. For example, if you work for your own company, you don’t pay to yourself. However you could have worked for somebody else and earned your wage. 3
Background image of page 3

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

View Full DocumentRight Arrow Icon
osts as Opportunity Costs Costs as Opportunity Costs ± Opportunity Cost : the implicit wage you could have earned by working for somebody else. ± Accountants measure the explicit costs but often ignore the implicit costs. ± Economists include all opportunity costs, including implicit costs, when measuring costs. ± Accounting Profit = Revenue - Explicit Costs. ± Economic Profit = Revenue - Explicit Costs - Implicit Costs 4
Background image of page 4
pportunity ost: Example Opportunity Cost: Example firm owns its own building and pays no rent z A firm owns its own building and pays no rent for office space. Does this mean the cost of ffice space is zero? office space is zero? z The building could have been rented instead. Foregone rent is the opportunity cost of using the building for production and should be a part of economic costs of doing business. 5
Background image of page 5

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

View Full DocumentRight Arrow Icon
osts as Opportunity Costs Costs as Opportunity Costs third, not so bvious, ost is unk costs ± A third, not so obvious, cost is sunk costs . ± Sunk costs are costs that have already been committed and cannot be recovered. ² It is not a part of cost of production because its opportunity cost is zero. The opportunity cost is zero because such investment/cost has no alternative use as it cannot be recovered (once invested or expended). 6
Background image of page 6
uick Quiz Quick Quiz 1. A farmer has planted corn seeds but has p not yet fertilized the field. the cost of eed pportunity cost or a ± Is the cost of seed opportunity cost or a sunk cost? Is the cost of fertilizer an pportunity cost or a sunk cost? opportunity cost or a sunk cost?
Background image of page 7

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

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 34

Topic_05_Cost - Topic 05 05 Costs Of Production COMM 295...

This preview shows document pages 1 - 8. Sign up to view the full document.

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