Managerial Economics

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Cost Analysis
Opportunity Costs Value of the next best foregone
opportunity. Accounting vs Economic
Costs Accounting costs explicit costs Economic
costs explicit costs implicit costs
(opportunity costs) Accounting vs Economic
profits TR accounting costs accounting
profit TR economic costs economic profit
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Cost Analysis
Total Revenue 85,000 Building
Rent 1,500 Utilities 800 Wages
4,000 Materials 6,500 Total Accounting
Costs 12,800 Salary on job given
up 30,000 Total Economic Costs
42,800 Accounting profit
72,200 Economic profit
42,200
Explicit costs
Implicit costs
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Cost Analysis

• Fixed Costs
• Costs that do not change as quantity changes.
• Fixed costs are irrelevant in output decision.
• At shutdown, many fixed costs become variable,
  thus affecting shutdown decision.
• Variable Costs
• Costs that DO change as quantity changes.
• Sunk Costs
• Expenses that have already been incurred and
  cannot be recovered.
• Sunk costs are irrelevant in production decisions.

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Relevant Cost Relationships

• TC TFC TVC
• ATC TC/Q AFC TFC/Q AVC TVC/Q
• ATC AFC AVC
• MC ?TC/ ?Q
• MR curve intersects average curves at minimums.
• Profit Max is where MC MR.
• Shutdown point when price falls below AVC.
• When price is below ATC, negative economic
  profits.

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