Costs Flashcards
How are economic costs different?
Economist use, economic costs or opportunity costs to evaluate the cost of resources
What is an implicit cost?
Opportunity costs.
What is an explicit cost?
Out of pocket costs for the firm. E.g Cost of acquiring labour, capital, energy and materials.
Opp cost is simply the market price
What is capital?
A durable good which provides services over a long period (land, equipment, buildings) used for further production
How do you measure opportunity cost of capital when capital is rented?
Simply the rental price.
Even if capital is purchased, the opp cost of using capital is the amount a firm could earn by renting it out to someone else so they can still use market rental rate to measure cost of capital.
What are fixed costs?
(F) Costs that do not vary with the level of output q
What is an example of fixed cost?
Rent, salaries of permanent employees
What are variable costs ? (VC)
Costs that vary with the level of output
What are variable costs?
Raw materials, labour (not always fully variable but assume for simplicity)
Total costs or just costs (C) are?
The sum of fixed and variable costs
What is the formula for C
C = F + VC
What are marginal costs?
Change in total costs if the firm produces an additional unit of output
Formula for MC?
Change in total cost/change in Q
Or
dC(q)/dq
AFC formula?
Fixed costs/Quantity
Trend of average fixed costs as output increases?
AFC always fall as output increases as fixed costs are spread over more units
What is AVC formula
VC/Q
Can increase or decrease with output
What is average total cost or average costs AC?
AC = AFC + AVC
What determines shape of short run cost curve?
Short run production function
What is MC in the SR cost curve?
MC = w / MP(L)
How do firms produce a given quantity of output at minimum cost?
Firms use information about their production functions and the price of production factors
What info do firms use to produce a given quantity of output at minimum cost?
Short run: only vary the amount of labour
Long run: can vary both capita and labour inputs
So long run costs will never be higher than short run costs!
What is an isocost line?
An isocost line shows combinations of inputs that require the same total cost
Isocost lines are similar to budget constraints but?
Consumers have one budget constraint only (determined by income and prices)
Firms have many isocost lines
What are the 3 properties of isocost lines?
- The firms cost level, c̅, and input prices determine where the isocost line hits the axes
- isocost further from the origin have higher costs than those closer
- slope of each isocost is the same and given by the relative prices of the inputs