COSTS

MIKE BECK

Key Concepts

• Explicit- Inputs (Factors of Production)» 1. Land

» 2. Labor

» 3. Capital

• Implicit- Opportunity costs» Entrepreneurial Ability

• Total Revenue – (Explicit + Implicit Costs) = Economic Profit – The full opportunity cost of capital invested in a business is

generally not included as a cost when accounting profits are calculated.

• *Wages is the biggest cost for business• Labor

Concepts Continued

• Sunk Cost- Cost you cant get back– Ex. Gym Club Membership

• TC=Total Costs• TFC= Total Fixed Costs

• Independent of production

• TVC= Total Variable Costs• Based on rate of production

• TC=TFC+TVC

Concepts (3)

• AVC – Average Variable Cost

• ATC- Average Total Cost– As marginal costs increase AVC and ATC

increase

• When Marginal Revenue = Marginal Cost this is the Optimum Level of Output

• Opportunity Cost- The next best thing given off in a trade off.

Relation to Other Topics

• Negative Externalities– Private Cost- cost to the business– Social Cost-includes negative externality

• Long Run– All costs are variable

AP Free Response

• http://apcentral.collegeboard.com/apc/public/repository/_ap06_frq_microeconom_51795.pdf

• 2006 Exam Question 1

Multiple Choice

• 1. When one decision is made, the next best alternative not selected is called

• (a) economic resource.

• (b) opportunity cost.

• (c) scarcity.

• (d) comparative disadvantage.

• (e) production.

Multiple Choice

• 2. What are variable costs?

• Select the best answer

• A. MC, ATC, AVC, AFC

• B. fixed + variable

• C. costs that vary with the Qproduced

• D. long run ATC falls as Qoutput rises

Multiple Choice

• 3. Which of the following is true of the concept of increasing opportunity cost?

• (a) It is unimportant in command economies because of central planning.

• (b) It suggests that the use of resources to produce a set of goods and services means that as

• more of one is produced, some of the other must be sacrificed.• (c) It is irrelevant if the production possibilities curve is convex to the

origin.• (d) It suggests that unlimited wants can be fulfilled.• (e) It means that resources are plentiful and opportunities to

produce greater amounts of goods and• services are unlimited.

Answers

• 1. B• The answer is opportunity cost because the definition

of opportunity cost states that it is the next best thing given up.

• 2. C• Variable costs are costs that correspond with the

quantity that is produced, the more you produce the more costs.

• 3. B• The more you produce of one thing, the more you are

giving up of another, that is opportunity cost.

Real World• http://news.bbc.co.uk/2/hi/entertainment/7584902.stm

• Opportunity Cost

• One very recent example was the Titian paintings that were offered to the government for £100M, they were saying on the news how the government could either build a new children's hospital with that money or they could spend it to keep the Titians in the public. The OC of the new hospital is the Titian paintings; the OC of the Titian paintings is the new hospital.

• http://www.brighthub.com/office/finance/articles/98561.aspx

• Explicit Costs