L4 Costs Flashcards
Explicit costs
Direct, out of pocket payments for inputs to its production process within given time period
Implicit costs
Reflect only foregone opportunity rather than explicit expenditure
Opportunity cost
Value of best alternative use of resource, includes explicit and implicit costs
Durable cost
Product that is usable for years
Sunk cost
Past expenditure that cannot be recovered
If expenditure is sunk, it is not an opportunity cost
Fixed Cost
Production expense that does not vary with output
Variable cost
Production expense that changes with the quantity of output produced
Marginal cost
Amount by which a firm’s cost changes if the firm produces one more unit of output
MC = delta C over delta Q
= delta VC over delta Q
AFC
Fixed costs divided by units of output produced
AVC
Variable cost divided by units of output produced
AC
Total cost divided by units of output produced
AVC+AFC
Isocost line
All the combinations of inputs that require the same total expenditure
C = wL + rK
Ways to minimise cost with isocost line
- Lowest-isocost rule: pick bundle of inputs where lowest isocost line touches isoquant
- Tangency rule: pick bundle of inputs where isoquant is tangent to isocost line
- Last-dollar rule: pick bundle of inputs where last dollar spent on one input gives as much extra output as last dollar spent on any other input
Expansion path
Cost-minimising combination of labour and capital for each output level
Economies of scale
Property of cost function whereby average cost of production falls as output expands
