Discussion Paper 3: What Is Cost – Assignment Example

“What is Cost?” Module: Opportunity cost is the next best alternative forgone by choosing another item. In other word, Opportunitycost is the sacrifice which we have to give in the process of making the best choice. For example, if we have a choice to buy either a car or a house and we end up buying a house, then car becomes our opportunity cost.
Short-run is a period of time when output is increased by increasing only the variable factors such as labor and not the fixed factors for e.g. land. Long-run is the period of time when the output can be increased by increasing the fixed factors also such as opening up another plant or buying another property of land etc.
We can convince him by giving him the estimate of cost of production that we think has been incurred by the dealer. We can tell him that if he sells us the car at this price, he will still make a profit. We can also tell him that the competitor is selling the same thing at a cheaper price or that the thing should be priced at that price to achieve equilibrium in the market.
The fixed costs are those costs that do not change with the output and remain constant whether the output or sale is very large or zero. This cost is included in the cost structure of a firm. Similarly, those costs which vary with the output such as cost of material are also included and is called the variable cost. Opportunity costs are also included in the economist’s calculations of costs. These costs, however, are not included in the accountant’s calculations of costs.
Average costs in the very short-run are related to the changes in fixed costs but later when output is very large the changes in average costs are associated with the changes in variable cost. As a result average costs decline faster than total cost and after reaching a minimum they start to rise with any increased production due to diseconomies of scale. By selling very large levels of output they are reducing their fixed costs until a time comes when these costs do not affect the total average cost much.
References:
Richard Lipsey and Alec Chrystal. Economics. 10th Edition. Oxford University Press 2003.
Campbell McConnell and Stanly Brue. Economics. McGraw-Hill (2005)
Robert Pindyck and Daniel Rubinfield. Microeconomics. Prentice Hall (2004)