Measuring costs, Microeconomics

Measuring Cost: Which Costs Matter?

Accounting Cost versus Economic Cost

- Accounting Cost

  • Actual expenses and adding the depreciation charges for the capital equipment

- Economic Cost

  • Cost to a firm of employing economic resources in production, involving the opportunity cost

Opportunity cost.

- Cost associated with opportunities that are foregone when a firm's resources are not put to their highest-value use.

An Example

- A firm has its own building and pays no rent for the space of office

- Does this mean cost of office space is zero?

Sunk Cost

- Expenditure which are made already and cannot be recovered back

- Should not influence firm's decisions.

An Example

- A firm pays $500,000 for option to buy building.

- The cost of building is $5 million or total of $5.5 million.

- The firm finds the other building for $5.25 million.

- Which building should the firm buy?

Fixed and Variable Costs

- Total output is the function of variable inputs and fixed inputs. 

- Thus, the total cost of production equals fixed cost (cost of the fixed inputs) plus variable cost (the cost of the variable inputs)

- Fixed Cost

  • Does not vary with level of output

- Variable Cost 

  • Cost which varies as the output varies

Fixed Cost

- Cost paid by firm which is in business regardless of level of output

Sunk Cost 

- Cost that have been incurred and recovering of it can't be done

?Personal Computers: most costs are variable 

- Components, labor

Software: most costs are sunk

- Cost of developing the software


- Largest cost component is fixed

1550_short run cost.png

Posted Date: 10/12/2012 2:09:55 AM | Location : United States

Related Discussions:- Measuring costs, Assignment Help, Ask Question on Measuring costs, Get Answer, Expert's Help, Measuring costs Discussions

Write discussion on Measuring costs
Your posts are moderated
Related Questions
technological advance reduced the cost of computer chips . explain using the demand and supply diagrams , how the the following markkets are affected in terms of price and quantiti

Determinants of Social Demand for Education - Equity Perfect equality is not observed in any society. Hierarchy in status, standards of living, capacities for effective demand

Examine the role of foreign direct investment (FDI) for developing countries Explanation of foreign direct investment as the direct ownership of capital in another country by a

"Assume the local fixed telecommunications company is a monopoly. It costs the company €2 per month to give voice messages service to a customer. Elasticity of demand for voice mes

Why might economic growth not be compatible with sustainable development? Define economic growth; enhance in national income during a time period. Explain sustainable developme

Economic Cycle The economic cycle is the long-standing sample of alternating times of economic growth (expansion) and decline (recession), followed by changing economic indica

The marginal rate of substitution (MRS) quantifies the quantity of one good a consumer will sacrifice to get more of the other good. – It is calculated by the slope of the indif

Suppose that demand is downward sloping and supply upward sloping. Subsidies cause dead weight loss despite the fact that: 1)consumer surplus increases. 2)total surplus increases

Dependence on agricultural production: Dependence on agricultural production and primary product for exports. The external sector comprises Imports and Exports, Ghana shows de

The raspberry growing industry is a perfectly competitive industry. The firms in the industry have a U-shaped LAC, minimum average cost is $8 and the minimum efficient scale is 4 u