Economic Cost versus Accounting Cost

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CHAPTER
The Cost of
Production

7.1 Measuring Cost: Which Costs
Matter?

7

Economic Cost versus Accounting Cost
● accounting cost equipment. CHAPTER OUTLINE
7.1

Measuring Cost: Which Costs
Matter?

7.2

Costs in the Short Run

7.3

Costs in the Long Run

7.4

Long-Run versus Short-Run Cost
Curves

7.5

Production with Two Outputs—
Economies of Scope

7.6

Dynamic Changes in Costs—The
Learning Curve

7.7

Estimating and Predicting Cost

● economic cost

Actual expenses plus depreciation charges for capital
Cost to a firm of utilizing economic resources in production.

Opportunity Cost
● opportunity cost Cost associated with opportunities forgone when a firm’s resources are not put to
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Of course a prospective sunk cost is different and, as we mentioned earlier, would certainly affect the firm’s decisions looking forward.

How do we know which costs are fixed and which are variable?
Over a very short time horizon—say, a few months—most costs are fixed.
Over such a short period, a firm is usually obligated to pay for contracted shipments of materials.
Over a very long time horizon—say, ten years—nearly all costs are variable.
Workers and managers can be laid off (or employment can be reduced by attrition), and much of the machinery can be sold off or not replaced as it becomes obsolete and is scrapped.
Copyright © 2013 Pearson Education, Inc. • Microeconomics • Pindyck/Rubinfeld, 8e.

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Copyright © 2013 Pearson Education, Inc. • Microeconomics • Pindyck/Rubinfeld, 8e.

AMORTIZING SUNK COSTS

MARGINAL COST (MC)

● amortization Policy of treating a one-time expenditure as an annual cost spread out over some number of years.

● marginal cost (MC) extra unit of output.

Amortizing large capital expenditures and treating them as ongoing fixed costs can simplify the economic analysis of a firm’s operation. As we will see, for example, treating capital expenditures this way can make it easier to understand the tradeoff that a firm faces in its use of labor versus capital.

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Because fixed cost does not change as the firm’s level of output changes, marginal cost is equal to the increase in variable
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