html5-img
1 / 21

Cost Concepts in Economics

Cost Concepts in Economics. Chapter 9. Cost Classification. Fixed or variable Cash or non-cash Accounting expense or not Opportunity costs. Opportunity Costs. Not an accounting expense Every input has an alternative use

jeremy-baker
Download Presentation

Cost Concepts in Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Cost Concepts in Economics Chapter 9

  2. Cost Classification • Fixed or variable • Cash or non-cash • Accounting expense or not • Opportunity costs

  3. Opportunity Costs • Not an accounting expense • Every input has an alternative use • OC is the value of product not produced because input was used for another purpose • OC is income that would have been received if input had been used in its most profitable alternative use

  4. Opportunity Costs • Not an accounting expense • Every input has an alternative use • OC is the value of product not produced because input was used for another purpose • OC is income that would have been received if input had been used in its most profitable alternative use

  5. Short-run and Long-run Costs • Short-run = time period when one or more inputs are fixed • Long-run = time period when all inputs can be changed (none are fixed)

  6. Fixed Costs • Costs associated with owning a fixed input or resource • Do not change as level of production changes • Incurred even if not input is used • Not under control of the manager in the short-run • Present in the short-run only

  7. DIRTI 5 • Depreciation =

  8. DIRTI 5 • Depreciation = • Interest =

  9. DIRTI 5 • Depreciation = • Interest = • Repairs • Taxes • Insurance

  10. DITI 4 • Depreciation = • Interest = • Taxes • Insurance

  11. Example of Fixed Costs • Purchase a pickup for $20,000 • Salvage value of $5,000 • Useful life of 5 years • Interest rate of 10% • Taxes are $25 / year • Insurance is $1,000 / year

  12. Variable Costs • Those costs that the manager has control over in a given period of time • Can be increased or decreased at the manager’s discretion • Feed, seed, fertilizer, etc

  13. Total and Average Costs • Total costs = TVC + TFC • Average Variable Costs (AVC) = TVC / Output level • Average Fixed Costs (AFC) = TFC / Output level • Average Total Costs (ATC) = TC / Output level = AVC + AFC

  14. Marginal Costs • Cost associated with a change in the output • What did it cost for the last unit of increased output? • MC =

  15. Typical Total Cost Curves $ TC TVC TFC Output

  16. Average and MarginalCost Curves $ ATC MC AVC AFC Output

  17. Stocking Rate Problem TFC = $4000VC = $395 / steer Selling price = $70 / cwt

  18. Stocking Rate Problem TFC = $4000VC = $395 / steer Selling price = $70 / cwt

  19. Production Rules Long-run • SP > ATC • Produce where MR=MC • SP < ATC • Do not produce Short-run • SP > ATC • Produce where MR=MC • ATC > SP > AVC • Making contribution to FC • Produce where MR=MC • SP < AVC • Do not produce

  20. Cost Concepts in EconomicsSummary • Cost Classification • Opportunity costs • Fixed, Variable, and Marginal costs • DITI 4 • Average total, fixed, and variable costs • Marginal costs • Cost Curves • Production rules

  21. Cost Concepts in Economics Questions?

More Related