Scribd
Upload
85 views

The Analysis of Costs: Managerial Economics

Business Economics

Uploaded by

alauoni
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
85 views

The Analysis of Costs: Managerial Economics

Business Economics

Uploaded by

alauoni
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 32

MANAGERIAL ECONOMICS:

THEORY, APPLICATIONS, AND CASES


W. Bruce Allen | Neil A. Doherty | Keith Weigelt | Edwin Mansfield

Chapter 6

THE ANALYSIS OF
COSTS
OBJECTIVES

• Explain how managers can use their


knowledge of the relationship between
costs and output to make decisions that
maximize the value of the firm
• Understand the difference between short-
run and long-run costs and the importance
of this distinction for managerial decisions
OPPORTUNITY COSTS

• Definitions
• Opportunity cost doctrine: the inputs’ values
(when used in their most productive way)
together with production costs (the accounting
costs of producing a product) determine the
economic cost of production
• Historical cost: the money that managers
actually paid for an input
OPPORTUNITY COSTS

• Definitions (cont’d)
• Explicit costs: the ordinary items accountants include
as the firm’s expenses
• Implicit costs: the foregone value of resources that
managers did not put to their best use
• Doctrine of sunk costs: Resources that are spent and
cannot be recovered
SHORT-RUN COST FUNCTIONS

• Definitions
• Cost function: Function showing various
relationships between input costs and output
rate
• Short run: Where the quantity of at least one
input is fixed
• Long run: Where the quantities of all inputs
are variable
• Fixed inputs: When the quantities of plant and
equipment cannot be altered
SHORT-RUN COST FUNCTIONS

• Definitions (cont’d)
• Scale of plant: This scale is determined by fixed
inputs.
• Variable inputs: Inputs that a manager can vary in
quantity in the short run
• Total fixed cost (TFC): the total cost per period of time
incurred for fixed inputs
• Total variable cost (TVC): the total cost incurred by
managers for variable inputs
• Total cost (TC = TFC + TVC): the sum of total fixed
and total variable costs
© 2013 W. W. Norton Co., Inc.
FIXED, VARIABLE, AND TOTAL COSTS:
MEDIA CORPORATION

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
AVERAGE AND MARGINAL COSTS

• Definitions
• Average fixed cost (AFC = TFC/Q): the total fixed cost
divided by output
• Average variable cost (AVC = TVC/Q): the total
variable cost divided by output
• Average total cost (ATC = TC/Q): the total cost
divided by output
• Marginal cost (MC = TC/Q): the incremental cost of
producing an additional unit of output
• Note: Marginal cost is defined as TC/Q for discrete
changes in Q and as forgone for continuous changes
in Q.
AVERAGE AND MARGINAL COSTS

• Relationships
• Let U be the number of input units used.
• Let W be the cost per unit of input.
• AVC = TVC/Q = W(U/Q) = W(1/AP) where AP
is the average product of U
• MC = TVC/Q = W(U/Q) = W(1/MP)
where MP is the marginal product of U
• MC = AVC when AVC is at a minimum
• MC = ATC when ATC is at a minimum
AVERAGE AND MARGINAL COSTS

• Example (Table 6.2 and Figure 6.2)


• AFC = 100/Q
• AVC = 50 – 110Q + Q2
• ATC = AFC + AVC = 100/Q + 50 – 110Q + Q2
• MC = TC/Q = TVC/Q = 50 – 220Q + 3Q2
• AVC is at a minimum where AVC/Q = – 11 + 2Q =
0;
MC = AVC = 19.75 and Q = 5.5
• ATC is at a minimum where ATC/Q = – (100/Q2) –
11 + 2Q = 0;
MC = ATC = 36.11 and Q = 6.6
© 2013 W. W. Norton Co., Inc.
AVERAGE AND MARGINAL COST CURVES:
MEDIA CORPORATION

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
© 2013 W. W. Norton Co., Inc.
THE EFFECTS OF OUTPUT ON THE COST
OF PRODUCING AIRCRAFT

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
LONG-RUN COST FUNCTIONS

• Definitions
• Long-run total cost function: Relationship between
long-run total cost and output
• Long-run average cost function: Function showing the
minimum cost per unit of all output levels when any
desired size plant is built
• Long-run marginal cost function: Function
representing how varying output affects the cost of
producing the last unit if the manager has chosen the
most efficient input bundle
SHORT-RUN AVERAGE COST FUNCTIONS
FOR VARIOUS SCALES OF PLANT

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
LONG-RUN AVERAGE COST FUNCTION

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
SHORT-RUN AVERAGE AND MARGINAL COSTS AND
LONG-RUN AVERAGE COST, MARTIN DIVISION

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
LONG-RUN TOTAL COST FUNCTION

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
MANAGERIAL USE OF SCALE ECONOMIES

• Economies of scale: When the firm’s average


unit cost decreases as output increases
• Example: Figure 6.6 – Economies of scale at Texas nursing
homes
• Economies of scale can result from larger plant size and/or
an increase in the number of plants.
• Economies of scale may be exploited by changes in
production, distribution, raising capital, advertising, and other
business processes.
• Diseconomies of scale: When the average unit
costs increase as output increases
LONG-RUN AVERAGE COST CURVE FOR
TEXAS NURSING HOMES

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
MANAGERIAL USE OF SCOPE ECONOMIES

• Economies of scope exist when the cost of


jointly producing two (or more) products is less
than the cost of producing each one alone.
•

• S = Degree of economies of scope


• C(Q1) = Cost of producing Q1 units of product 1
• C(Q2) = Cost of producing Q2 units of product 2
• C(Q1 + Q2) = Cost of producing Q1 units of product 1
and Q2 units of product 2
ECONOMIES OF SCOPE IN ADVERTISING
AGENCIES

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
THE NETWORK FOR A HYPOTHETICAL
FEDERAL EXPRESS

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
© 2013 W. W. Norton Co., Inc.
© 2013 W. W. Norton Co., Inc.
MANAGERIAL USE OF BREAK-EVEN
ANALYSIS

• Break-even point (QB): Output level that must be


reached if managers are to avoid losses
• QB = TFC/(P – AVC)
• TFC = Total fixed cost
• P = Price
• AVC = Average variable cost
• Example (Figure 6.8)
• TFC = $600,000
• P = $3
• AVC = $2
• QB = 600,000
BREAK-EVEN CHART: MARTIN COMPANY

Managerial Economics, 8e
Copyright @ W.W. & Company 2013
PROFIT CONTRIBUTION ANALYSIS

• Profit contribution analysis: a break-even


analysis to understand the relationship between
price and profit
• QB’ = (TFC + Profit target)/(P – AVC)
• QB’ = Minimum output level that will attain the
profit target
PROFIT CONTRIBUTION ANALYSIS

• Profit contribution analysis (cont’d)


• Example
• QB’ = ($600,000 + $1,000,000)/($3 – $2) = 1,600,000
• TFC = $600,000
• Profit target = $1,000,000
• Price = $3
• AVC = $2
This concludes the Lecture
PowerPoint Presentation for
Chapter 6: THE ANALYSIS OF COSTS

Visit the StudySpace at:


http://www.wwnorton.com/college/econ/mec8/

W. W. Norton & Company


Independent and Employee-Owned

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy