Cost Concepts in Economics - PowerPoint PPT Presentation

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  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?