Measuring Cost. Which Costs Matter? ■ Fixed cost o Cost paid by a firm that is in business regardless of the level of output a Sunk cost o Cost that have been incurred and cannot be recovered Chapter 7 Slide 16
Chapter 7 Slide 16 ◼ Fixed Cost ⚫ Cost paid by a firm that is in business regardless of the level of output ◼ Sunk Cost ⚫ Cost that have been incurred and cannot be recovered Measuring Cost: Which Costs Matter?
Measuring Cost Which Costs Matter? Personal Computers: most costs are variable ● Components, labor a Software. most costs are sunk o Cost of developing the software Chapter 7 Slide 17
Chapter 7 Slide 17 ◼ Personal Computers: most costs are variable ⚫Components, labor ◼ Software: most costs are sunk ⚫Cost of developing the software Measuring Cost: Which Costs Matter?
Measuring Cost Which Costs Matter? ■ Pizza o Largest cost component is fixed Chapter 7 Slide 18
Chapter 7 Slide 18 ◼ Pizza ⚫Largest cost component is fixed Measuring Cost: Which Costs Matter?
A Firm's Short-Run Costs($) Rate of fixed variable otal Marg inal verage Average Average Output Cost Cost Cost Cost Fixed Variab Tota (Fc) (Vc) (TC) (MC Cost Cost Cost (AFC) (AVC) (ATC) 50 50 50 50 100 50 50 50 100 0123456789 50 78 128 28 25 39 64 50 98 148 20 16.7 32.749.3 50 112 162 14 12.5 28 40.5 50 130 180 18 10 26 36 50 150 200 20 8.3 25 33.3 50 175 225 25 7.1 25 32.1 50 204 254 29 6.3 25.531.8 50 242 292 38 5.6 26932.4 10 50 300 350 58 30 35 50 385 435 85 4.5 35 39.5
A Firm’s Short-Run Costs ($) 0 50 0 50 --- --- --- --- 1 50 50 100 50 50 50 100 2 50 78 128 28 25 39 64 3 50 98 148 20 16.7 32.7 49.3 4 50 112 162 14 12.5 28 40.5 5 50 130 180 18 10 26 36 6 50 150 200 20 8.3 25 33.3 7 50 175 225 25 7.1 25 32.1 8 50 204 254 29 6.3 25.5 31.8 9 50 242 292 38 5.6 26.9 32.4 10 50 300 350 58 5 30 35 11 50 385 435 85 4.5 35 39.5 Rate of Fixed Variable Total Marginal Average Average Average Output Cost Cost Cost Cost Fixed Variable Total (FC) (VC) (TC) (MC) Cost Cost Cost (AFC) (AVC) (ATC)
Cost in the short run a Marginal Cost (Mc) is the cost of expanding output by one unit. Since fixed cost have no impact on marginal cost, it can be written as △VC△TC MC= △Q△Q Chapter 7 Slide 20
Chapter 7 Slide 20 Cost in the Short Run ◼ Marginal Cost (MC) is the cost of expanding output by one unit. Since fixed cost have no impact on marginal cost, it can be written as: Q TC Q VC MC = =