Comm 295 - Class 6 Notes - Comm 295 6.1-6.3 Costs...

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Comm 295 6.1-6.3 Costs Technologically efficient: produce level of output without any wasted/unnecessary inputs Economically efficient : minimizing the cost of producing a specified output level 6.1 THE NATURE OF COSTS - Explicit costs: direct (out-of-pocket) payments for inputs to its production process during a given time period - Implicit costs: forgone opportunity OPPORTUNITY COSTS Opportunity cost : the value of the best alternative use of the resource - Explicit costs (if firm buys input, opportunity cost is the market price in which the firm paid for – best alternative would be to sell it if didn’t use) - Value of a manager’s time - May not be included in a financial statement but need to take into account during decision making COSTS OF DURABLE INPUTS Durable good : a product that is usable for a long period (many years) - Capital – how to allocate initial purchase cost over time, what to do if value of capital changes over time o Can expense (one-time) or amortize (over-time) o Value of trucks, machines and other equipment declines over time (declining opportunity cost due to declining rental values) o Value of land, buildings and other forms of capital may rise over time SUNK COSTS Sunk cost : a past expenditure that cannot be recovered - Not relevant in decision making process - Is deducted from income and appear in financial accounts - Opportunity cost is zero 6.2 SHORT-RUN COSTS - Short run is the period over which some inputs can be varied while other inputs are fixed COMMON MEASURES OF COST Fixed Cost, Variable Cost, and Total Cost Fixed cost (F): a cost that does not vary with the level of output - Cannot be avoided by reducing output and must be incurred as long as the firm stays in business - Sometimes sunk cost Variable cost (VC): a cost that changes as the quantity of output changes - Cost of variable inputs – inputs firm can adjust to alter its output level - Eg labour, materials Total cost (C): sum of a firm’s variable cost and fixed cost C = VC + F Average Cost Average fixed cost (AFC): fixed cost divided by units of output produced
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This note was uploaded on 12/07/2011 for the course COMM 295 taught by Professor Ratna during the Winter '09 term at The University of British Columbia.

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Comm 295 - Class 6 Notes - Comm 295 6.1-6.3 Costs...

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