Chapter 7 The Cost of Production
Chapter 7 The Cost of Production
Topics to be Discussed a Measuring Cost: Which Costs Matter? ■ Cost in the short rur a Cost in the Long Run a Long-Run Versus Short-Run Cost Curves Chapter 7 Slide 2
Chapter 7 Slide 2 Topics to be Discussed ◼ Measuring Cost: Which Costs Matter? ◼ Cost in the Short Run ◼ Cost in the Long Run ◼ Long-Run Versus Short-Run Cost Curves
Topics to be Discussed a Production with TWo Outputs-- Economies of Scope Dynamic Changes in Costs--The Learning curve a Estimating and Predicting Cost Chapter 7 Slide 3
Chapter 7 Slide 3 Topics to be Discussed ◼ Production with Two Outputs-- Economies of Scope ◼ Dynamic Changes in Costs--The Learning Curve ◼ Estimating and Predicting Cost
Introduction a The production technology measures the relationship between input and output a Given the production technology, managers must choose how to produce Chapter 7 Slide 4
Chapter 7 Slide 4 Introduction ◼ The production technology measures the relationship between input and output. ◼ Given the production technology, managers must choose how to produce
Introduction a To determine the optimal level of output and the input combinations, we must convert from the unit measurements of the production technology to dollar measurements or costs Chapter 7 Slide 5
Chapter 7 Slide 5 Introduction ◼ To determine the optimal level of output and the input combinations, we must convert from the unit measurements of the production technology to dollar measurements or costs
Measuring Cost Which Costs Matter? Economic Cost vs Accounting Cost ■ Accounting Cost o Actual expenses plus depreciation charges for capital equipment ■ Economic cost o Cost to a firm of utilizing economic resources in production, including opportunity cost Chapter 7 Slide 6
Chapter 7 Slide 6 Measuring Cost: Which Costs Matter? ◼ Accounting Cost ⚫ Actual expenses plus depreciation charges for capital equipment ◼ Economic Cost ⚫ Cost to a firm of utilizing economic resources in production, including opportunity cost Economic Cost vs. Accounting Cost
Measuring Cost Which Costs Matter? a Opportunity cost o Cost associated with opportunities that are foregone when a firms resources are not put to their highest-value use Chapter 7 Slide 7
Chapter 7 Slide 7 ◼ Opportunity cost. ⚫ Cost associated with opportunities that are foregone when a firm’s resources are not put to their highest-value use. Measuring Cost: Which Costs Matter?
Measuring Cost Which Costs Matter? ■ An Example o A firm owns its own building and pays no rent for office space o Does this mean the cost of office space s zero ? Chapter 7 Slide 8
Chapter 7 Slide 8 ◼ An Example ⚫ A firm owns its own building and pays no rent for office space ⚫ Does this mean the cost of office space is zero? Measuring Cost: Which Costs Matter?
Measuring Cost Which Costs Matter? ■ Sunk cost Expenditure that has been made and cannot be recovered o Should not influence a firms decisions Chapter 7 Slide 9
Chapter 7 Slide 9 ◼ Sunk Cost ⚫ Expenditure that has been made and cannot be recovered ⚫ Should not influence a firm’s decisions. Measuring Cost: Which Costs Matter?
Measuring Cost Which Costs Matter? a An EXample o A firm pays $500,000 for an option to buy a building The cost of the building is $5 million or a total of $5.5 million o The firm finds another building for $5.25 million o Which building should the firm buy? Chapter 7 Slide 10
Chapter 7 Slide 10 ◼ An Example ⚫ A firm pays $500,000 for an option to buy a building. ⚫ The cost of the building is $5 million or a total of $5.5 million. ⚫ The firm finds another building for $5.25 million. ⚫ Which building should the firm buy? Measuring Cost: Which Costs Matter?