7 Flashcards
Annual cost of owning
and using a capital asset, equal to economic
depreciation plus forgone interest.
● user cost of capital
describe
the combination of inputs
to production that cost the
same amount to the firm.
Isocost curves
Graph showing all
possible combinations of labor and
capital that can be purchased for a
given total cost.
Isocost line
Cost per year of renting one unit of capita
● rental rate
The price of capital is its user cost, given by r = Depreciation rate + Interest rate.
The Price of Capital
We now turn to a fundamental problem that all firms face: how to select inputs
to produce a given output at minimum cost.
The Cost-Minimizing Input Choice
Actual expenses plus
depreciation charges for capital equipment.
accounting cost
Cost to a firm of utilizing
economic resources in production,
including opportunity cost.
economic cost
Cost associated with
opportunities that are forgone when a firm’s
resources are not put to their best alternative use
opportunity cost
Expenditure that has been
made and cannot be recovered.
sunk cost
Total economic cost
of production, consisting of fixed and
variable costs.
● total cost (TC or C)
Cost that does not vary
with the level of output and that can be
eliminated only by shutting down.
fixed cost (FC)
