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TESTE DEIN WISSEN

Fixed Costs vs. Sunk Costs

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TESTE DEIN WISSEN

Fixed Costs

  • can be avoided if firm goes out of business 
  • affect the firm's decision looking forward 
  • high relative to revenue 


Sunk costs

  • costs that have been incurred and cannot be recovered 
  • it should not influence a firm's decision


Prospective Cost

  • does affect the firm's decision looking forward 
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TESTE DEIN WISSEN

Economic Cost

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TESTE DEIN WISSEN

Cost to a firm of utilizing economic resources in production


-> including accounting and opportunity costs

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TESTE DEIN WISSEN

Rental Rate 

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TESTE DEIN WISSEN

Cost per year of renting one unit of capital.

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TESTE DEIN WISSEN

Long-Run Average Cost Curve (LAC)

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TESTE DEIN WISSEN

Curve relating average cost of production to output when all inputs, including capital, are variable. 

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TESTE DEIN WISSEN

Short-Run Average Cost Curve (SAC)

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TESTE DEIN WISSEN

Curve relating average cost of production to output when level of capital is fixed. 

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TESTE DEIN WISSEN

Opportunity Cost

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TESTE DEIN WISSEN

Cost associated with opportunities forgone when a firm's resources are not put to their best alternative use. 

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TESTE DEIN WISSEN

Variable Cost (VC)

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TESTE DEIN WISSEN

Cost that varies as output varies. 

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TESTE DEIN WISSEN

Shutting Down

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TESTE DEIN WISSEN

Does not mean going out of business.


  • by reducing output to zero, company could eliminate costs of materials and labor, but it would still incur the fixed costs (manager, security guards)
  • only way to eliminate those costs: going out of business 
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TESTE DEIN WISSEN

Fixed or Variable Cost?

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TESTE DEIN WISSEN

Fixed Cost

  • short period of time (a few month)


Variable Cost

  • very long time horizon (ten years)


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TESTE DEIN WISSEN

Amortization 

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TESTE DEIN WISSEN

Policy of treating a one-time expenditure as an annual cost spread out over some number of years. 


Abschreibung/Tilgung

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TESTE DEIN WISSEN

sunk cost 

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TESTE DEIN WISSEN

Expenditure that has been made and cannot be recovered. 


-> it has no alternative use, its opportunity cost is zero

-> it should not influence the firm's decision


Lösung ausblenden
TESTE DEIN WISSEN

Average Variable Cost (AVC)

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TESTE DEIN WISSEN

Variable cost divided by the level of output.

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Q:

Fixed Costs vs. Sunk Costs

A:

Fixed Costs

  • can be avoided if firm goes out of business 
  • affect the firm's decision looking forward 
  • high relative to revenue 


Sunk costs

  • costs that have been incurred and cannot be recovered 
  • it should not influence a firm's decision


Prospective Cost

  • does affect the firm's decision looking forward 
Q:

Economic Cost

A:

Cost to a firm of utilizing economic resources in production


-> including accounting and opportunity costs

Q:

Rental Rate 

A:

Cost per year of renting one unit of capital.

Q:

Long-Run Average Cost Curve (LAC)

A:

Curve relating average cost of production to output when all inputs, including capital, are variable. 

Q:

Short-Run Average Cost Curve (SAC)

A:

Curve relating average cost of production to output when level of capital is fixed. 

Mehr Karteikarten anzeigen
Q:

Opportunity Cost

A:

Cost associated with opportunities forgone when a firm's resources are not put to their best alternative use. 

Q:

Variable Cost (VC)

A:

Cost that varies as output varies. 

Q:

Shutting Down

A:

Does not mean going out of business.


  • by reducing output to zero, company could eliminate costs of materials and labor, but it would still incur the fixed costs (manager, security guards)
  • only way to eliminate those costs: going out of business 
Q:

Fixed or Variable Cost?

A:

Fixed Cost

  • short period of time (a few month)


Variable Cost

  • very long time horizon (ten years)


Q:

Amortization 

A:

Policy of treating a one-time expenditure as an annual cost spread out over some number of years. 


Abschreibung/Tilgung

Q:

sunk cost 

A:

Expenditure that has been made and cannot be recovered. 


-> it has no alternative use, its opportunity cost is zero

-> it should not influence the firm's decision


Q:

Average Variable Cost (AVC)

A:

Variable cost divided by the level of output.

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