Lecture08 - Lecture 08: Costs Perlo Chapter 7 Vladimir...

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Lecture 08: Costs Perlo/ Chapter 7 Vladimir Petkov VUW 26 March 2010 Vladimir Petkov (VUW) Lecture 08: Costs 26 March 2010 1 ± 25
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Economic Costs The economic cost or the opportunity cost is the value of the best alternative use of a resource. Explicit costs are those which have to be paid for directly. Implicit costs are those which accrue in the form of foregone alternatives but are not actually charged for in cash terms. Accounting costs Economic costs often di/er from accounting costs! Economic costs may be higher or lower. Vladimir Petkov (VUW) Lecture 08: Costs 26 March 2010 2 ² 25
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Economic Costs (Continued) These di/erences are especially drastic for durable assets (e.g. capital or land). Economists take into account the implicit cost of these assets. In contrast, accountants use arbitrary amortization rules. Also economists do not worry about sunk costs. Sunk costs are expenditures that cannot be recovered. They are irrelevant for economic decisions. We will distinguish between short-run and long-run costs: short-run costs : production costs when one or more inputs are &xed; long-run costs : production costs when all inputs are variable. Vladimir Petkov (VUW) Lecture 08: Costs 26 March 2010 3 ± 25
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Long-Run Input Choice q = f ( K , L ) . Let the price of labor be w and the price of capital be r . Thus, the cost of inputs is C = wL + rK . L and K to minimize its production cost subject to attaining a given level of output ¯ q . min L , K C = wL + rK s. t. ¯ q = f ( K , L ) . Vladimir Petkov (VUW) Lecture 08: Costs 26 March 2010 4 / 25
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The Isocost Line The combinations of labor and capital that cost a given amount are summarized by the isocost line . Fixing the input cost at ¯ C , the equation of the isocost line is ¯ C = wL + rK . The isocost line is downward sloping. If we increase the amount of labor, we must reduce capital to keep the cost unchanged. Isocost lines that are farther from the origin correspond to a higher cost. We are using more inputs, so they cost more. Solving the isocost equation for K , we get K = ¯ C r w r L . So the slope of the isocost line is dK dL = w r . Vladimir Petkov (VUW) Lecture 08: Costs 26 March 2010 5 / 25
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The Isocost Line (Continued) Slope of isocost is L K r w - w C / r C / Vladimir Petkov (VUW) Lecture 08: Costs 26 March 2010 6 / 25
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By changing ¯ C , we can obtain a whole family of isocost lines. L
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This note was uploaded on 05/24/2011 for the course ECON 201 taught by Professor Paulclacott during the Fall '10 term at Victoria Wellington.

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Lecture08 - Lecture 08: Costs Perlo Chapter 7 Vladimir...

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