11/10/2011 10:46:00 AM Economic Costs Implicit Opportunity Cost Accounting Costs Explicit Keeping track of assets and liabilities

ties Sunk Costs Has been made and cannot be recovered Prospective Sunk Cost: o Investment o Relevant to economic decision-making Incremental Cost Same concept as marginal cost Average Fixed Cost Declines as output increases Fixed Labor Cost A salaried manager who has a 3 year employment contract Average Total Cost Curve ATC of a given level of output is the slope of the line from the origin to the TC curve at that output level Marginal Cost Curve MC of a given level of output is the slope of the line that is tangent to the VC curve at that level of output MC of a given level of output is the slope of the line that is tangent to the TC curve at that level of output Intersects ATC, AVC, at their minimums Expansion Path Curve that shows the least-cost combination of inputs needed to Isocost produce each level of output for given input prices and Expansion Path Optimum Combinations Slopes of isoquant and isocost curves are equal Costs are minimized for the production of a given output MRTS = ratio of input prices

11/10/2011 10:46:00 AM Price Takers Perfectly Competitive Firm Firm that cannot influence the market price Firms often use patent rights as a barrier to entry A few sellers may behave if they operate in a perfectly competitive market: the market is very elastic Goal of maximizing the market value of the firm may be more appropriate than maximizing short-run profits because: Market Value of firm is based on long-run profits Managers will not focus on increasing short-run profits at the expense of long-run profits This would more closely align the interests of owners and managers Marginal Revenue Graphically is: The slope of the TR curve at a given point At profit maximizing level of output, the TR and TC curves have the same slope When they have the same slope they are the furthest from each other If current output is less than profit maximizing output Next unit produced will increase revenue more than it increases its cost Marginal revenue must be greater than marginal cost At Profit Maximizing, Marginal Profit is zero Demand curve of a perfectly competitive firm is perfectly horizontal Same as its AR curve and its MR curve Perfectly Competitive Firms MR is horizontal Marginal Profit is VE when output exceeds profit-maximizing level

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