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Chapter 13 - The Costs of Production
Measuring Economic Profit
Because economic profit is a more useful concept for business
decision-making than accounting profit, a number of consulting
firms sell software packages that calculate economic profit, usually
called "economic value added." For example, AFS Associates sells
a package called FinanceAdvisor.
Measuring Cost Curves
The cost curves that we derive in economics really are used
in the real world. They help managers understand their costs and how
to minimize such costs. Here’s an example of the use of cost
curves in the mining industry.
The Value of Economies of Scale
The concept of economies of scale drives many economic decisions.
For example, the degree to which economies of scale translate
into lower prices can be seen in this example from the electronics
industry.
Fixed Costs
What do we mean by fixed costs? In economics, the distinction
between fixed and variable costs depends on the time frame. One
could argue that there are no fixed costs in the long run. Conversely,
even the cost of labor could be treated as fixed in the very short
run. In this article, Distribution
of Variable vs Fixed Costs of Hospital Care, the analysis
suggests that 84 percent of a hospital's costs are fixed. Read
the article to see if that statistic is consistent with your understanding
of fixed costs and how the analysis depends on the time frame
being considered.
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