Chapter 07 - 06.04.2011 Chapter 7 Costs An economist is a...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
06.04.2011 1 Chapter 7 Costs An economist is a person who, when invited to give a talk at a banquet, tells the audience there’s no such thing as a free lunch. ECON201 – Spring 2011 7-2 Chapter 7 Outline 7.1 Measuring Costs 7.2 Short-Run Costs 7.3 Long-Run Costs 7.4 Lower Costs in the Long Run 7.5 Cost of Producing Multiple Goods ECON201 – Spring 2011 7-3 Chapter 7: Costs How does a firm determine how to produce a certain amount of output efficiently? First, determine which production processes are technologically efficient . • Produce the desired level of output with the least inputs. Second, select the technologically efficient production process that is also economically efficient . • Minimize the cost of producing a specified amount of output. Because any profit-maximizing firm minimizes its cost of production, we will spend this chapter examining firms’ costs.
Background image of page 1

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

View Full DocumentRight Arrow Icon
06.04.2011 2 ECON201 – Spring 2011 7-4 7.1 Measuring (ALL) Costs Explicit costs are direct, out-of-pocket payments for inputs such as labor, capital, energy, and materials. Implicit costs reflect a forgone opportunity. The opportunity cost of a resource is the value of the best alternative use of that resource. There’s no such thing as a free lunch. ” refers to the opportunity cost of your time, an often overlooked resource. Although many businesspeople only consider explicit costs, economists also take into account implicit costs. ECON201 – Spring 2011 7-5 7.1 Measuring (ALL) Costs Capital is a durable good , which means it is a product that is usable for many years. Difficult to measure the cost of a durable good Initial purchase cost must be allocated over some time period Value of capital may change over time; capital depreciation implies opportunity costs fall over time Avoid cost measurement problems if capital is rented Example: College’s cost of capital Estimates of the cost of providing an education frequently ignore the opportunity cost of the campus real estate ECON201 – Spring 2011 7-6 7.1 Measuring (ALL) Costs Opportunity costs are not always easily observed, but should always be taken into account in production decisions. Sunk costs , past expenditures that cannot be recovered, are easily observed, but are never relevant in production decisions. Sunk costs are NOT opportunity costs. Example: Grocery store checkout line • Time spent waiting in a slow line should not influence your decision to switch to a different checkout line or stay put
Background image of page 2
06.04.2011 3 ECON201 – Spring 2011 7-7 7.2 Short-Run Costs Recall that the short run is a period of time in which some inputs can be varied, while other inputs are fixed. Short run cost measures all assume labor is variable and capital is fixed: Fixed cost ( F ) : a cost that doesn’t vary with the level of output (e.g. expenditures on land or production facilities).
Background image of page 3

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

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/22/2012 for the course ECON 201 taught by Professor Çakmak during the Fall '10 term at Middle East Technical University.

Page1 / 14

Chapter 07 - 06.04.2011 Chapter 7 Costs An economist is a...

This preview shows document pages 1 - 4. Sign up to view the full document.

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