Analysis of Costs
Everywhere that production cogs, costs follow close behind like a shadow. Firms must pay for their inputs: screws, solvents, software, sponges, secretaries, and statisticians. Profitable businesses are acutely aware of this simple fact as they determine their production strategies, since every dollar of unnecessary costs reduces the firm’s profits by that same dollar. But the role ‘of costs goes far beyond influence the level of production. Smart businesses also pay close attention to their costs when they choose among alternative production strategies. Is it cheaper to hire a new worker or to pay overtime? To open a new factorv or expand an old one? To invest in new machinery at home or relocate production abroad? Businesses want to choose that method of
production which is most” efficient. that is, which produces output at the lowest costs. This chapter i:; devoted to a thorough analysis of cost. First we consider the full array of economic costs, including the central notion of marginal COSL~. Then we examine how business accountants measure cost in practice. Finally, we look at the notion’ of port unity cost. a broad concept that can be applied to a wide range of decisions. This comprehensive study of cost will lay the foundation for understanding the supply decisions of business firms.
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