Transcript of Real Life Average Costs

The world is going to give you [is] data. And so, for whatever volume index you are using to measure your output you are going to end up with a series of dots, and that means in order to figure out what your cost functions are going to be you have to provide yourself with a statistical measure to get there. What I’m going to be measuring right here is going to be your average total cost so that’s the last function we are dealing with things that costs can take on.

Anyway, the world will go ahead and give you data, which means that in order to analyze this you are going to need some fairly high level statistics. Now I know enough of you have taken some statistical classes that you have seen some regression analysis. But for the most part you have to be more sophisticated than what you’ve had in your classes. Commonly, you want to use some things referred to your regression [video cutout] that costs are not always as low as they can possibly be. You’re making the assumption that whenever anyone makes a mistake; it’s always going to be a mistake that is going to increase cost in some way. And so, what you’re looking at here is not trying to put a line through the mass of dots that’s right here, but you’re trying to put a little line that is under most of the mass of dots. [video cutout] Instead of your common regression having as your error term in something that is symmetric, where it’s equally likely to be positive as negative but doing something which is more likely to be positive than negative, making it show through that your mistakes are always going to be things that are going to cost you a little bit more.