THEORY OF COSTS Flashcards
(19 cards)
is defined in terms of the cost of the foregone or sacrificed alternative.
ECONOMIC COST
also known as explicit costs, are costs that involve money being spent. Examples include rent, interest payments and utility bills
ACCOUNTING COSTS
it is the total cost of choosing one action over another. It includes the accounting cost and the opportunity cost/ implicit cost
ECONOMIC COST
COSTS IN RELATION TO THE BUSINESS FIRMS OPERATIONS:
A. COSTS IN THE SHORT RUN
B. COSTS IN THE LONG RUN
MAIN COSTS IN THE SR
- Total Cost = Fixed Cost + Variable Cost
- Variable Cost = Total Cost - Fixed Cost
- Fixed Cost = Total Cost - Variable Cost
4 PER UNIT COSTS
- Average cost = TC/Q
- Average Variable Cost = VC/Q
- Average Fixed Cost = FC/ Q
- Marginal Cost = ΔTC/ΔQ
are obligations made by the firm in its operations.
Costs
out-of-pocket or actual expenditures made by the business firms. Usually, these are paid to the non-owners of the firm and are recorded in the firm’s financial statements.
Explicit Costs:
these are costs of self-owned or self-employed resources. No actual monetary payments are usually made.
Implicit Costs
Explicit Costs only
Accounting costs
Explicit + Implicit Costs
Economic costs
Examples of Internal Economies of Scale
- Technology
- Buying Power
- Financial or capacity of big firms in acquiring credit
defined as a fall in the long run average costs because of an increased scale of production. This basically means the cost of production per unit reduces as you produce more units.
Economies of Scale
Causes of Diseconomies of Scale
- Workers: difficulty in managing large number of work force
- Supply chain: difficulty in coordinating informations across factories and countries.
Examples of Diseconomies of Scale - Poor Communication: due to ineffective flow of communications between departments/ divisions/ head offices/ subsidiaries.
The low motivation of workers in large firms results in lower productivity, as workers may feel they are just another cog in the machine.
Motivation
Examples of External Economies of Scale
- Transportation
- Skilled Labor/ Specialization of labor
the loss of management efficiency that occurs when firms become large and operate in uncompetitive markets.
Management Inefficiency
difficult to coordinate operations when firms are large.
Coordination
