ch07.. managerial economics

8/9/2019 ch07.. Managerial Economics

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Pre ared b Robert F. Brooker Ph.D. Co ri ht ©2004 b

Managerial Economics in a

Global Economy, 5th Editionby

Dominick SalvatoreChapter 7

Cost Theory and Estimation


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The Natre o! Costs

" E#plicit Costs

$ %cconting Costs

" Economic Costs $ &mplicit Costs $ %lternative or 'pportnity Costs

" (elevant Costs $ &ncremental Costs $ Snk Costs are &rrelevant


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Short)(n Cost *nctions

%verage Total Cost + %TC + TC1-

%verage *i#ed Cost + %*C + T*C1- %verage /ariable Cost + %/C + T/C1-

%TC + %*C 0 %/C

Marginal Cost + ∆TC1∆- + ∆T/C1∆-


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- T*C T/C TC %*C %/C %TC MC2 342 32 342 ) ) ) )

42 62 2 342 362 32 3626 42 82 92 82 5 :5 2

8 42 :5 25 62 5 85 5: 42 2 :2 5 62 85 855 42 85 95 6 67 89 55


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7/24Pre ared b Robert F. Brooker Ph.D. Co ri ht ©2004 b


%verage /ariable Cost

%/C + T/C1- + ;1%



=ong)(n Cost Crves

=ong)(n Total Cost + =TC + !-.

=ong)(n %verage Cost + =%C + =TC1-=ong)(n Marginal Cost + =MC + ∆=TC1∆-



Derivation o! =ong)(n Cost Crves



(elationship >et;een =ong)(n andShort)(n %verage Cost Crves



=earning Crves

%verage Cost o! ?nit - + C + a-b

Estimation *orm@ log C + log a 0 b =og -



MinimiAing Costs &nternationally

" *oreign Sorcing o! &npts

" Ne; &nternational Economies o! Scale

" &mmigration o! Skilled =abor

" >rain Drain



=ogistics or Spply Chain

Management" Merges and integrates !nctions

$


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Cost)/olme)



Cost)/olme)E + :2



'perating =everage

'perating =everage + T*C1T/C

Degree o! 'perating =everage + D'=

/ 0 1/ 0 1

Q P AVC DOLQ Q P AVC TFC π ∆ −= =

∆ − −



'perating =everage

TC has a higher D'=than TC and there!ore

a higher ->E



Empirical Estimation

Data Collection &sses" 'pportnity Costs Mst be E#tracted

!rom %cconting Cost Data

" Costs Mst be %pportioned %mong




*nctional *orm !or Short)(n Cost *nctions

2 )TVC aQ bQ cQ= + +

2TVC AVC a bQ cQ

Q

= = + +

22 ) MC a bQ cQ= + +

Theoretical *orm =inear %ppro#imation

TVC a bQ= +

a AVC b

Q

= +

MC b=



Empirical EstimationTheoretical *orm =inear %ppro#imation




=ong)(n Cost Crves

" Cross)Sectional (egression %nalysis" Engineering Method

" Srvival Technie

ch07.. managerial economics

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