Measuring Cost Which Costs Matter? Economic Cost vs Accounting Cost ■ Accounting Cost o Actual expenses plus depreciation charges for capital equipment ■ Economic cost o Cost to a firm of utilizing economic resources in production, including opportunity cost Chapter 7 Slide 6
Chapter 7 Slide 6 Measuring Cost: Which Costs Matter? ◼ Accounting Cost ⚫ Actual expenses plus depreciation charges for capital equipment ◼ Economic Cost ⚫ Cost to a firm of utilizing economic resources in production, including opportunity cost Economic Cost vs. Accounting Cost
Measuring Cost Which Costs Matter? a Opportunity cost o Cost associated with opportunities that are foregone when a firms resources are not put to their highest-value use Chapter 7 Slide 7
Chapter 7 Slide 7 ◼ Opportunity cost. ⚫ Cost associated with opportunities that are foregone when a firm’s resources are not put to their highest-value use. Measuring Cost: Which Costs Matter?
Measuring Cost Which Costs Matter? ■ An Example o A firm owns its own building and pays no rent for office space o Does this mean the cost of office space s zero ? Chapter 7 Slide 8
Chapter 7 Slide 8 ◼ An Example ⚫ A firm owns its own building and pays no rent for office space ⚫ Does this mean the cost of office space is zero? Measuring Cost: Which Costs Matter?
Measuring Cost Which Costs Matter? ■ Sunk cost Expenditure that has been made and cannot be recovered o Should not influence a firms decisions Chapter 7 Slide 9
Chapter 7 Slide 9 ◼ Sunk Cost ⚫ Expenditure that has been made and cannot be recovered ⚫ Should not influence a firm’s decisions. Measuring Cost: Which Costs Matter?
Measuring Cost Which Costs Matter? a An EXample o A firm pays $500,000 for an option to buy a building The cost of the building is $5 million or a total of $5.5 million o The firm finds another building for $5.25 million o Which building should the firm buy? Chapter 7 Slide 10
Chapter 7 Slide 10 ◼ An Example ⚫ A firm pays $500,000 for an option to buy a building. ⚫ The cost of the building is $5 million or a total of $5.5 million. ⚫ The firm finds another building for $5.25 million. ⚫ Which building should the firm buy? Measuring Cost: Which Costs Matter?