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The Nature of Costs

The Nature of Costs. Explicit Costs Accounting Costs Economic Costs Implicit Costs Alternative or Opportunity Costs Relevant Costs Incremental Costs Sunk Costs are Irrelevant. Short-Run Cost Functions. Total Cost = TC = f(Q) Total Fixed Cost = TFC Total Variable Cost = TVC

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The Nature of Costs

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  1. The Nature of Costs • Explicit Costs • Accounting Costs • Economic Costs • Implicit Costs • Alternative or Opportunity Costs • Relevant Costs • Incremental Costs • Sunk Costs are Irrelevant

  2. Short-Run Cost Functions Total Cost = TC = f(Q) Total Fixed Cost = TFC Total Variable Cost = TVC TC = TFC + TVC

  3. Short-Run Cost Functions Average Total Cost = ATC = TC/Q Average Fixed Cost = AFC = TFC/Q Average Variable Cost = AVC = TVC/Q ATC = AFC + AVC Marginal Cost = TC/Q = TVC/Q

  4. Short-Run Cost Functions

  5. Short-Run Cost Functions Average Variable Cost AVC = TVC/Q = w/APL Marginal Cost TC/Q = TVC/Q = w/MPL

  6. Long-Run Cost Curves Long-Run Total Cost = LTC = f(Q) Long-Run Average Cost = LAC = LTC/Q Long-Run Marginal Cost = LMC = LTC/Q

  7. Derivation of Long-Run Cost Curves

  8. Relationship Between Long-Run and Short-Run Average Cost Curves

  9. Possible Shapes ofthe LAC Curve

  10. Learning Curves Average Cost of Unit Q = C = aQb Estimation Form: log C = log a + b Log Q

  11. Minimizing Costs Internationally • Foreign Sourcing of Inputs • New International Economies of Scale • Immigration of Skilled Labor • Brain Drain

  12. Architecture of Ideal Firm • Core Competencies • Outsourcing of Non-Core Tasks • Learning Organization • Efficiency and Flexibility • Location Near Markets • Agility in Responding to Market Forces

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