lecture11 SIGNIFICANCE MEANING OF ECONOMIC COST 平狄克微观经济学英文教材.ppt

SIGNIFICANCE MEANING OF ECONOMIC COST Why care about costs? Should drive business decisions regarding price, production, investment, etc. Affects which companies and technologies succeed, and which ones fail Determines the size of firms Determines the level, structure and trends in prices paid for goods and services SIGNIFICANCE MEANING OF ECONOMIC COST Meaning of economic cost Measure the use of resources in the production of goods and services Accountants measure only explicit expenses (and sometimes not even those) “Opportunity cost” includes the value of employed resources in their best alternative use what matters is expenditure affected by a decision there may also be “external costs” born by those not involved in production (e.g., pollution) TAXONOMY OF COSTS Total v. Average v. Marginal AC = TC / Q also referred to as “unit costs” MC = ΔTC / ΔQ sometimes called “incremental” TAXONOMY OF COSTS TAXONOMY OF COSTS Fixed v. Variable how costs vary with level of output [total cost] = [variable cost] + [fixed cost] Example of fixed costs CA business license: $800 per year (nontransferable) NYC taxi medallion: $227,000 in perpetuity (transferable) TAXONOMY (cont’d) Other cost distinctions production vs. transaction costs one-time vs. recurring costs COST MINIMIZATION The firm’s problem A profit maximizing firm won’t spend more to produce its output than it has to: MinimizeL,K TC = rK + wL Subject to: f(L,K) = Q0 The solution in words: find the cheapest input combination that produces the desired level of output iso-quant curve: input combinations that produce the same quantity of output Slope of iso-quant = - MRTSL,K = - MPL/MPK iso-cost lines: input combinations that cost same amount wL + rK = C (a constant) = K = (C - wL ) / r slope of iso-cost = ΔK / ΔL (along an iso-cost line) = - w / r compare: budget lines Putting two together MRTSL,K = MPL / MPK = w / r COST MINIMIZATION Solution: another view MPL / w = MPK / r 1/w = the amount of labo