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1、CHAPTERTENCostFunctionsInthischapterweillustratethecoststhata?rmincurswhenitproducesoutput.InChapter11,wewillpursuethistopicfurtherbyshowinghow?rmsmakepro?t-maximizinginputandoutputdecisions.De?nitionsofCostsBeforewecandiscussthetheoryofcosts,somedif?cu
2、ltiesabouttheproperde?nitionof‘‘costs’’mustbeclearedup.Speci?cally,wemustdistinguishbetween(1)accountingcostand(2)economiccost.Theaccountant’sviewofcoststressesout-of-pocketexpenses,his-toricalcosts,depreciation,andotherbookkeepingentries.Theeconomist’s
3、de?nitionofcost(whichinobviouswaysdrawsonthefundamentalopportunity-costnotion)isthatthecostofanyinputisgivenbythesizeofthepaymentnecessarytokeeptheresourceinitspresentemployment.Alternatively,theeconomiccostofusinganinputiswhatthatinputwouldbepaidinitsn
4、extbestuse.Onewaytodistinguishbetweenthesetwoviewsistoconsiderhowthecostsofvariousinputs(labor,capital,andentrepreneurialservices)arede?nedundereachsystem.LaborcostsEconomistsandaccountantsregardlaborcostsinmuchthesameway.Toaccountants,expendituresonlab
5、orarecurrentexpensesandhencecostsofproduction.Forecono-mists,laborisanexplicitcost.Laborservices(labor-hours)arecontractedatsomehourlywagerate(w),anditisusuallyassumedthatthisisalsowhatthelaborserviceswouldearnintheirbestalternativeemployment.Thehourlyw
6、age,ofcourse,includescostsoffringebene?tsprovidedtoemployees.CapitalcostsInthecaseofcapitalservices(machine-hours),thetwoconceptsofcostdiffer.Incalcu-latingcapitalcosts,accountantsusethehistoricalpriceoftheparticularmachineunderinvestigationandapplysome
7、more-or-lessarbitrarydepreciationruletodeterminehowmuchofthatmachine’soriginalpricetochargetocurrentcosts.Economistsregardthehistoricalpriceofamachineasa‘‘sunkcost,’’whichisirrelevanttooutputdecisions.Theyinsteadregardtheimplicitcostofthemachinetobewhat
8、someoneelsewouldbewillingtopayforitsuse.Thus,thecostofonemachine-houristherentalrateforthatmachineinitsbestalternativeuse.Bycontinuingtousethemachineitself,the?rmis333334Part4:ProductionandSupplyimplicitlyforgoingwhatsomeoneelsew
