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Managerial Economics - Final Study Guide

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Management Core
MGCR 293
Kamal Salmasi

MANAGERIAL ECONOMICS STUDY GUIDEMCMRoptimal outputACARhelps decide whether to operate in SR or LROpportunity Cost the costs of inputs to a rm are their values in their most valuable alternative usesHistorical Cost amount actually paid for a particular inputExplicit cost ordinary items that an accountant would include as the rms expensesRaw materials Storage Production costs Marketing costs Distribution costs Communication and utility costsImplicit Cost opportunity costs of resources owned and used by the rms ownerLost revenue from occupying the production building instead of renting it outEconomic Cost sum of explicit cost plus implicit costFixed Cost does not depend on the rms level of output Cost incurred even if the rm is producing nothing and cannot be recoveredRentindependent of level of productionVariable Cost depends on the level of production chosenProduction costsdependent of productionShort Run Cannot change quantity of some of its inputs Firm decides how much output to produce in the current facility In SR some production inputs are xed and must be paid for LabourRaw materials are considered variable inputs in short runLong Run time it takes to build a production facility and start producing output In LR rm decides what size and type of facility to build All inputs are variable even plant and equipment can be altered in quantity Can change both xed and variable costsAverage Fixed Costs AFC TFCQNumerator xed More goods produced Less AFCAverage Variable Costs AVC TVCQWhen TVCQ AVC decreasesWhen TVCQ AVC biggerMarginal Costs MCTFCTVCQIn SR TFC0SoMCTVC QAFC falls as output rises Spreading OverheadTotal Variable Cost Curve shows relationship between TVC and level of rms outputDerived from production requirements and input pricesMarginal Cost increase in total cost that results from producing one more unit of outputReects changes in VCMeasures additional cost of inputs required to produce each successive unit of outputBecause in the SR every rm is constrained by some xed input means thatThe rm faces diminishing returns to variable inputsThe rm has limited capacity to produce outputBecomes increasingly costly to produce successively higher levels of output
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