Week 9 chapter notes

3 Pages
Unlock Document

University of Toronto Scarborough
Economics for Management Studies

Chapter 7 The Cost of Production Notes 7.1 Measuring Cost: Which Costs Matter? Economic Cost versus Accounting Cost N accounting cost actual expenses plus depreciation charges for capital equipment N economic cost cost to a firm of utilizing economic resources in production, including opportunity cost Opportunity Cost N opportunity cost cost associated with opportunities that are forgone when firms resources are not put to best alternative use N when estimating future probability of business, economists and managers are concerned with capital cost of plant and machinery N this cost involves not only monetary outlay for buying and running the machinery, but also the cost associated with wear and tear N when evaluating past performance, cost accountants use tax rules that apply to broadly defined types of assets to determine allowable depreciation in their cost and profit calculations; but these depreciation allowances need not reflect the actual wear and tear on the equipment, which is likely to vary asset by asset Sunk Costs N although an opportunity cost is often hidden, it should be taken into account when making economic decisions N sunk cost expenditure that has been made and cannot be recovered N a sunk cost is usually visible, but after it has been incurred it should always be ignored when making future economic decisions N because a sunk cost cannot be recovered, it should not influence the firms decisions Fixed Costs and Variable Costs N total cost (TC or C) total economic cost of production, consisting of fixed and variable costs N fixed cost (FC) cost that does not vary with the level of output and that can be eliminated only by shutting down N variable cost (VC) cost that varies as output varies Marginal and Average Cost N marginal cost (MC) increase in cost resulting from the production of one extra unit of output; MC = VC q = TC q N average total cost (ATC) firms total cost divided by its level of output; ATC = TC q N average fixed cost (AFC) fixed cost divided by the level of output; AFC = FC q N average variable cost (AVC) variable cost divided by the level of output; AVC = VC q 7.2 Cost in the Short Run The Determinants of Short-Run Cost N the change in variable cost for a unit cost of the extra labour w (fixed wage) times the amount of extra labour needed to produce the extra output L MC = VC q = w L q MC = w MP L N diminishing marginal returns means that the marginal product of labour declines as the quantity of labour employed increases N as a result, when there are diminishing margina
More Less

Related notes for MGEB02H3

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.