COSTS

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COSTS

• MIKE BECK

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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

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Concepts Continued

• Sunk Cost- Cost you cant get back
• Ex. Gym Club Membership
• TCTotal Costs
• TFC Total Fixed Costs
• Independent of production
• TVC Total Variable Costs
• Based on rate of production
• TCTFCTVC

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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.

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Relation to Other Topics

• Negative Externalities
• Private Cost- cost to the business
• Social Cost-includes negative externality
• Long Run
• All costs are variable

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AP Free Response

• http//apcentral.collegeboard.com/apc/public/repos
  itory/_ap06_frq_microeconom_51795.pdf
• 2006 Exam Question 1

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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.

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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

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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.

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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.

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Real World

• http//news.bbc.co.uk/2/hi/entertainment/7584902.s
  tm
• 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/9
  8561.aspx
• Explicit Costs

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