16/11/15
Lesson 2: Cost Theory-Economic Costs, Short-Run
Economic cost of producing a good is the opportunity cost of the firm's production. Opportunity cost of the factors of production (resources) that have been used in producing the good or service.
1. Explicit costs: Any costs to a firm that involve direct payment of money. Opportunity cost of factors of production not owned by the firm is simply the price that is paid for them and alternative things that could have been bought. Ex. Alessandro opens a cachapa stand on calle 72. His explicit costs are the costs in which are needed for production; ingredients, maintenance of the cart, and advertising. |
2. Implicit costs: Earnings that a firm could have had if it had employed its factors in another use or if it had hired out or sold them to another firm. Ex. Owner of a firm may be able to earn $100,000 per year in her next best job, as a mechanical engineer. This opportunity cost should be included in the firm's economic costs. Some would argue that it is the most important cost that a firm needs to cover since they'll go to the alternative occupation if this cost is not accounted for. Ex. Firm owns buildings that it uses to produce its goods. The buildings could be rented out to other firms for $15,000 per month. The opportunity cost to the firm of using the buildings itself is the rent foregone and things that could have been purchased. |
Activity:
Short-run costs:
Assume that the cost of a machine per week is $100 (there are four machines) and cost of a worker is $200 per week.
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Activity 2: Complete the following table; FC, TC, MC, AVC (VC/Q), AFC (FC/Q), ATC (TC/Q). What can you observe from the completed table? Illustrate these cost curves when data is complete.
Output VC FC TC MC AVC AFC ATC
0 0 10 -
1 10
2 17
3 25
4 40
5 60
6 110