7.1 Measuring Costs
How much would it cost you to stand at the wrong end of a shooting gallery?
—S. J. Perelman
To show how a firm’s cost varies with its output, we first have to measure costs. Businesspeople and economists often measure costs differently. Economists include all relevant costs. To run a firm profitably, a manager must think like an economist and consider all relevant costs. However, this same manager may direct the firm’s accountant or bookkeeper to measure costs in ways that are more consistent with tax laws and other laws so as to make the firm’s financial statements look good to stockholders or to minimize the firm’s taxes.1
To produce a particular amount of output, ...
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