1 / 23

Economic Analysis for Managers (ECO 501) Fall:2012 Semester

Economic Analysis for Managers (ECO 501) Fall:2012 Semester. Khurrum S. Mughal. Theme of the Lecture. Cost Theory & Analysis Economic Concept of Cost Short-Run Cost Function Profit Contribution Analysis Breakeven Analysis Operating Leverage. Economic Concept of Cost.

Pat_Xavi
Download Presentation

Economic Analysis for Managers (ECO 501) Fall:2012 Semester

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Economic Analysis for Managers (ECO 501)Fall:2012 Semester Khurrum S. Mughal

  2. Theme of the Lecture • Cost Theory & Analysis • Economic Concept of Cost • Short-Run Cost Function • Profit Contribution Analysis • Breakeven Analysis • Operating Leverage

  3. Economic Concept of Cost • Opportunity costsare the value of the other products that the resources used in production could have produced at their next best alternative • Explicit costs include the ordinary items that an accountant would include as the firms expenses • Implicit costsinclude opportunity costs of resources owned and used by the firm’s owner

  4. Economic Concept of Cost • Normal Profit and Costs • Economic Profit is revenue less economic costs, where the economic costs also include the normal returns to management or capital of the owner. • Cost of Long-Lived Assets • The economic costs of such assets would be the change in market value from the beginning to the end of the period

  5. Economic Concept of Cost • Marginal Costs are the change in total cost due to one unit change in output • Incremental Costsis the additional cost of implementing a managerial decision • Sunk Costs are expenditures that have been made in the past or that are to be made in the future due to some contractual obligation

  6. Theme of the Lecture • Cost Theory & Analysis • Economic Concept of Cost • Short-Run Cost Function • Profit Contribution Analysis • Breakeven Analysis • Operating Leverage

  7. Short-Run A period of time so short that the firm cannot alter the quantity of some of its inputs • Typically plant and equipment are fixed inputs in the short run • Fixed inputs determine the scale of the firm’s operation

  8. Short-Run Cost Functions Total Cost = TC = f(Q) Total Fixed Cost = TFC Total Variable Cost = TVC TC = TFC + TVC

  9. Short-Run Cost Functions

  10. Short-Run Cost Functions TFC

  11. Short-Run Cost Functions Average Total Cost = ATC = TC/Q Average Fixed Cost = AFC = TFC/Q Average Variable Cost = AVC = TVC/Q ATC = AFC + AVC Marginal Cost = TC/Q = TVC/Q

  12. Short-Run Cost Functions

  13. Short-Run Cost Functions

  14. Short-Run Cost Functions

  15. Minimum Average Variable Cost Total Cost Function TC = 1000 + 10Q – 0.9Q2 + 0.04Q3 Rate of output resulting in minimum average variable cost?

  16. Theme of the Lecture • Cost Theory & Analysis • Economic Concept of Cost • Short-Run Cost Function • Profit Contribution Analysis • Breakeven Analysis • Operating Leverage

  17. Profit Contribution Analysis 18 Profit Contribution is the difference between price and average variable cost (P – AVC) You can find out the output rate necessary to cover all fixed costs and earn required profit (πR) FC = $10,000, P = $30, AVC = $28, πR = $20,000

  18. Theme of the Lecture • Cost Theory & Analysis • Economic Concept of Cost • Short-Run Cost Function • Profit Contribution Analysis • Breakeven Analysis • Operating Leverage

  19. Breakeven Analysis 20 A special case where you find the breakeven point by placing πR= 0 FC = $10,000, P = $30, AVC = $28 TC = 10,000 + 28Q TR = 30Q

  20. Linear Breakeven Analysis Linear Breakeven Analysis Revenue, Cost Rate of Output, Q 21

  21. Theme of the Lecture • Cost Theory & Analysis • Economic Concept of Cost • Short-Run Cost Function • Profit Contribution Analysis • Breakeven Analysis • Operating Leverage

  22. Operating Leverage 23 If fixed costs are relatively large than variable costs the firm is said to be highly leveraged It experiences more variation in profit for a percentage change in output. Can be analyzed using profit elasticity Eπ

More Related