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Cost Concepts in Economics Chapter 9

2. Objectives. Explain opportunity cost and its use in decision making.Discuss the difference between the short-run and long-run.Understand the difference between fixed costs and variable costs.Learn to identify and compute fixed costs and variable costs.Learn to compute the different average co

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Cost Concepts in Economics Chapter 9

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    1. 1 Cost Concepts in Economics (Chapter 9)

    2. 2 Objectives Explain opportunity cost and its use in decision making. Discuss the difference between the short-run and long-run. Understand the difference between fixed costs and variable costs. Learn to identify and compute fixed costs and variable costs. Learn to compute the different average costs. Use fixed and variable costs to make short-run and long-run production decisions. Discuss economies of size and how they explain changes in farm size and profitability.

    3. 3 Opportunity Cost The income that would have been received if the input had been used in its most profitable alternative use. The value of the product not produced because an input was used for another purpose. An “economic concept” not an “accounting concept.” As economic decision-makers, we assume costs include opportunity costs.

    4. 4 Costs Total fixed costs (TFC) Average fixed costs (AFC) Total variable costs (TVC) Average variable cost (AVC) Total cost (TC) Average total cost (ATC) Marginal cost (MC)

    5. 5 Short-Run & Long-Run “Time concepts” rather than fixed periods. Short-run: One or more production input is fixed: Increasing cropland? One crop or livestock production cycle. Long-run: The quantity of all necessary production inputs can be changed. Expand or acquire additional inputs.

    6. 6 Fixed Costs Result from owning a fixed input or resource. Incurred even if the resource isn’t used. Don’t change as the level of production changes (in the short run). Exist only in the short run. Not under the control of the manager in the short run. The only way to avoid fixed costs is to sell the item.

    7. 7 Fixed Costs (DIRTI – 5) Depreciation Interest Rent Taxes (property) Insurance Cash Noncash

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