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MKT731 Notes for Final Exam (Primer, Ch 2-5, 7-9, 11, 13, 14)

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Ryerson University
MKT 731
Richard Michon

Primer Economic Concepts for Strategy 20140424 1221 AM CostsCost Functions Total Cost FunctionRepresents relationship between a firms total costs TC and the total amount of output it produces in a given time period QEfficiency relationship assuming that firm produces in most efficient manner possible given its current technological capabilities100806040200012345678Not linear due to economies of scaleFixed and Variable CostsVariable costs ie Direct labour and commissions to salespeople increase as output increasesFixed costs ie General and admin expenses remain constant as output increasesTHREE IMPORTANT POINTS o The line dividing fixed and variable costs is often fuzzy one may have variable and fixed components or may be semifixed fixed over certain ranges but variable over others o Fixed costs are invariant to the firms outputmeaning it can be affected by other dimensions of the firms operations o Whether a cost is fixed or variable depends on the time period in which decisions regarding output are contemplatedAverage and Marginal Cost FunctionThe average cost function ACQ describes how the firms averageperunitofoutput costs vary with the amount of output it produces Formulao Economies of scale Average costs decrease outputs increase o Diseconomies of scale Average costs increase outputs increase o Constant returns to scale Average cost remains unchanged regardless of outputMarginal costs MCQ describes rate of change of total cost with respect to outputIncremental cost of producing exactly one more unit of output Formulao When average cost is a decreasing function of output marginal cost is less than average cost o When average cost neither increases nor decreases in output because it is constant or at minimum marginal cost is equal to average cost o When average cost is an increasing function of output marginal cost is greater than average cost3530252015105001234567Cost Functions LongRun vs ShortRunShortrun average costsAverage fixed costsaverage variable costs o SACQAFCQAVCQAs the volume of output increases average fixed costs become smaller pulls down SACTotal fixed costs are spread over a larger production volumeSunk vs Avoidable CostsSunk costs Incurred no matter what the decision is and cannot be avoidedAvoidable costs Prevent incurrence of costs if certain choices are madeEconomic Costs and ProfitabilityEconomic vs Accounting CostsEconomic costs Based on the concept of opportunity costcost of deploying resources in a particular activity is the value of the best foregone alternative use of those resources
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