MANAGERIAL ECONOMICS 11th Edition - PowerPoint PPT Presentation

1 / 33
About This Presentation
Title:

MANAGERIAL ECONOMICS 11th Edition

Description:

Cost analysis is made difficult by the effects of unforeseen inflation and ... Implicit cost: The forgone return the firm's owners could have received had they ... – PowerPoint PPT presentation

Number of Views:289
Avg rating:3.0/5.0
Slides: 34
Provided by: markhi7
Category:

less

Transcript and Presenter's Notes

Title: MANAGERIAL ECONOMICS 11th Edition


1
MANAGERIAL ECONOMICS 11th Edition
  • By
  • Mark Hirschey

2
Cost Analysis and Estimation
  • Chapter 9

3
Chapter 9OVERVIEW
  • What Makes Cost Analysis Difficult
  • Opportunity Cost
  • Incremental and Sunk Costs in Decision Analysis
  • Short-run and Long-run Costs
  • Firm Size and Plant Size
  • Learning Curves
  • Cost-volume-profit Analysis

4
What Makes Cost Analysis Difficult?
  • Cost analysis is made difficult by the effects of
    unforeseen inflation and unpredictable changes in
    technology.
  • Link Between Accounting and Economic Valuations
  • Accounting and economic costs often differ.

5
  • Historical Versus Current Costs
  • Historical cost is the actual cash outlay.
  • Current cost is the present cost of previously
    acquired items.
  • Replacement Cost
  • Cost of replacing productive capacity using
    current technology.

6
Opportunity Cost
  • Opportunity Cost Concept The cost of using
    resources to produce a good or service is the
    opportunity cost to the owners of the firm using
    those resources. The opportunity cost to the
    firms owners of using a resource is what the
    owners must give up to use the resource. All
    costs of production are opportunity costs, and
    for decision making purposes, it is opportunity
    costs that matter.
  • The foregone value associated with the current
    rather than next-best use of a given asset
  • The opportunity cost of using an input or a
    resource is classified as either an explicit or
    an implicit cost.

7
  • Explicit and Implicit Costs
  • Explicit cost An out-pocket monetary (cash)
    payment for the use of a resource.
  • Implicit cost The forgone return the firms
    owners could have received had they used their
    own resources in their best alternative
    (noncash).

8
Incremental and Sunk Costs in Decision Analysis
  • Incremental Cost
  • Incremental cost is the change in cost tied to a
    managerial decision.
  • Incremental cost can involve multiple units of
    output.
  • Marginal cost involves a single unit of output.
  • Profit Contribution P - AVC
  • Sunk Cost
  • Irreversible expenses incurred previously.
  • Sunk costs are irrelevant to present decisions.

9
Short-run and Long-run Costs
  • Short-run cost functions, used for day-to-day
    operating decisions.
  • Long-run cost functions, used for long-range
    planning.
  • How Is the Operating Period Defined?
  • At least one input is fixed in the short run.
  • All inputs are variable in the long run.

10
  • Fixed and Variable Costs
  • Fixed cost is a short-run concept.
  • All costs are variable in the long run.

11
Short-run Cost Curves
  • Short-run Cost Categories
  • Total Cost Fixed Cost Variable Cost
  • For averages, ATC AFC AVC
  • Marginal Cost, MC ?TC/?Q
  • Short-run Cost Relations
  • Short-run cost curves show minimum cost in a
    given production environment.

12
(No Transcript)
13
(No Transcript)
14
Long-run Cost Curves
  • Long-run cost curves show minimum cost in an
    ideal environment
  • Economies of Scale Occur when long-run average
    cost falls as output increases.

15
Cost Elasticity and Economies of Scale
  • Cost elasticity, measures the change in TC
    associated with a 1 in output.
  • Cost elasticity is eC ?C/C ?Q/Q.
  • eC lt 1 means falling AC, increasing returns.
  • eC 1 means constant AC constant returns.
  • eC gt 1 means rising AC, decreasing returns.

16
Minimum Efficient Scale
  • Competitive Implications of Minimum Efficient
    Scale
  • MES is the minimum point on the LRAC curve.
  • Competition is most vigorous when
  • MES is small in absolute terms.
  • MES is a small share of industry output.
  • Disadvantage to less than MES scale is modest.

17
Transportation Costs and MES
  • Terminal, line-haul and inventory costs can be
    important.
  • High transport costs reduce MES impact.

18
Firm Size and Plant Size
  • Multi-plant Economies and Diseconomies of Scale
  • Multi-plant economies are cost advantages from
    operating several plants.
  • Multi-plant diseconomies are cost disadvantages
    from operating several plants.

19
(No Transcript)
20
Learning Curves
  • Learning Curve Concept
  • For many manufacturing processes, average costs
    decline substantially as cumulative total output
    increases. Advantages to learning are present
    when AC fall with greater production experience.
  • Learning causes an inward shift in the LRAC
    curve.
  • Learning curve advantages are often mistaken for
    economies of scale effects.

21
  • Learning Rate,is defined as the percentage by
    which average cost falls as output doubles.
  • LR
  • Strategic Implications of the Learning Curve
    Concept
  • When learning results in 20 to 30 cost savings,
    it becomes a key part of competitive strategy.

22
(No Transcript)
23
Economies of Scope
  • Economies of Scope exist when the joint cost of
    producing two or more goods is less that the sum
    of the separate costs of producing the goods.
  • Scope economies are cost advantages that stem
    from producing multiple outputs.
  • Big scope economies explain the popularity of
    multi-product firms.
  • Without scope economies, firms specialize.
  • Exploiting Scope Economies
  • Scope economics often shape competitive strategy
    for new products.

24
Cost-volume-profit Analysis
  • Cost-volume-profit Charts
  • Cost-volume-profit analysis Analytical technique
    used to study relations among costs, revenues,
    and profits.
  • Breakeven analysis shows zero profit points of
    cost coverage.
  • Profit Contribution P - AVC

25
(No Transcript)
26
(No Transcript)
27
Degree of Operating Leverage
  • DOLPercentage Change in Profit / Percentage
    Change in Sales
  • DOL(??/?)/(?Q/Q)
  • DOL (??/?Q)?(Q/?)
  • DOLQ(P-AVC)/Q(P-AVC)-TFC
  • DOL is the elasticity of profit with respect to
    output.

28
(No Transcript)
29
Self Test Problem 1
30
(No Transcript)
31
Self Test Problem 2
32
(No Transcript)
33
(No Transcript)
Write a Comment
User Comments (0)
About PowerShow.com