fm6e-chapter09 - Farm Management Chapter 9 Cost Concepts in...

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Farm Management Chapter 9 Cost Concepts in Economics
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farm management chapter 9 2 Chapter Outline Opportunity Cost Fixed, Variable, and Total Costs Application of Cost Concepts Economies of Size Shape of the LRAC Curve
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farm management chapter 9 3 Chapter Objectives 1. Explain the importance of opportunity cost and its use 2. Clarify the difference between short run and long run 3. Discuss the difference between fixed and variable costs 4. Identify fixed costs and show how to compute them 5. Show how to compute average costs 6. Demonstrate the use of costs in short run and long run decisions 7. Explore economies of size
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farm management chapter 9 4 Opportunity Cost The income that could have been earned by selling or renting the input to someone else, or The income that could have been received if the input had been used in its most profitable alternative use
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farm management chapter 9 5 Everything Has an Opportunity Cost Even if you use the input in its best possible use, there is an opportunity cost for the item you did not produce. (In this case, opportunity cost will be less than the revenue actually received.)
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farm management chapter 9 6 Opportunity Cost of Operator Time Opportunity cost of operator's labor : What the operator could earn for that labor in best alternative use Opportunity cost of operator's management : Difficult to estimate Total of opportunity cost of labor and opportunity cost of management should not exceed total expected salary in best alternative job
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farm management chapter 9 7 Management The opportunity cost of management is difficult to estimate. The opportunity cost of labor and management cannot be greater than the total salary that could be earned at the best alternative job.
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farm management chapter 9 8 Capital There are many possible uses for capital. Higher expected returns often carry higher risks. In agriculture, the opportunity cost of capital is often set equal to the interest rate on savings or the interest rate on borrowed capital. For some assets, such as land, a rental rate could be use. If assets decrease in value every year, their opportunity costs need to be decreased.
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