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8_CostsinSR - Read the book COSTS IN THE SHORT RUN Pindyck...

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Read the book! COSTS IN THE SHORT RUN Pindyck & Rubinfeld
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All Firms Think About Costs Production requires inputs Production requires inputs. Inputs have to be hired/rented. So they must be compensated. Therefore, the firm incurs a cost in order to produce. Firms want to produce output at the lowest cost possible. But, what exactly do we mean by cost? We mean economic cost.
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Economic cost accounting cost measures actual expenses. plus depreciation charges for capital equipment economic cost measures the cost of using inputs for production even if there is no actual payment on them. Inputs often have alternative uses Inputs often have alternative uses. Then, by using it here, we have foregone the opportunity to use it in the alternative process. The loss of this opportunity is a cost. Economic cost = cost of actual expenses + opportunity cost Economic cost = cost of actual expenses + opportunity cost.
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Economic cost does not include sunk cost!
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