Mostly summarized from Gregory Mankiw’s
Principles of Economics, 5th
Ed.
PART 5 Firm Behavior
and the Organization of Industry
Chapter
14 of 36 Firms In Competitive Markets
Section
14 of 24
…
Figure
3 here
…
Economists
say a cost is a “sunk cost”
· when
it is committed and cannot be recovered
· because
nothing can be done about sunk costs
· a
firm can ignore them when making decisions
A
firm cannot recover its fixed costs by temporarily stopping production.
Regardless
of the quantity of output supplied, even if zero, the
firm still has to pay its fixed costs.
As a
result, fixed costs
·
are sunk in the short run
· are
ignored when deciding how much to produce
Per
Figure 3 the firm's short-run supply curve
· is
the part of the marginal cost (MC) curve
· that
lies above its average variable cost (AVC) curve
…
Consider
you place a $15 value on seeing a newly released movie, you would pay up to $15
to see it.
You
buy a ticket for $10, but you lose the ticket before entering the theater.
Should
you buy another ticket?
Should
you go home and refuse to pay a total of $20 to see the movie?
The
answer is you should buy another ticket
·
the $15 benefit of seeing the movie
· still
exceeds the $10 opportunity cost for the second ticket
The first
$10 you paid for the lost ticket is a sunk cost.
Since
you value seeing the movie at $15 you will only lose $5.
… …
Comments
Post a Comment