Economic CostsThis is a featured page

Explicit and Implicit Costs
  • Economic Cost (opportunity cost)- the economic cost of any resource used to produce a good is the value or worth the resource would have in its best alternative use, whether those resources are owned by others or by the firm.
  • Explicit Costs - the monetary payments (or cash expenditures) a firm makes to those who supply labor services, materials, fuel, transportation services. Such money payments are for the use of resources owned by others.
    • For example, an explicit cost would be the salaries paid to workers.
  • Implicit Costs - the opportunity costs a firm makes when it uses its self-owned, self-employed resources. For firms, implicit costs are the money payments that self-employed resources could have earned in their best alternative use.
    • For example, an implicit cost would be the money lost from renting the work space out to other people. Forgone wages, forgone interest, forgone lent etc.
    • Normal profit as a cost: The minimum profit needed in order for the business venture to be worthwhile for the firm to maintain open, as opposed to going into another field of work. This falls under implicit costs. This would be the cost of using your entrepreneurial skills for one company instead of for something else.
    • Normal profit represents the value that you place on your entrepreneurial ability.


Economic Profit (Pure Profit)
  • Economic Profit = Total Revenue - Economic Cost
    (economic costs = explicit + implicit costs)
  • If a firm is earning only enough revenue to cover its costs, it means the firm is meeting all explicit and implicit costs (including a normal profit).
    • the entrepreneur is receiving just enough payment (a normal profit) to continue to be in the present line of production.
    • even when economic profit is zero, the firm will continue producing
    • economic profit=covering normal profit
  • If a firm's total revenue > all firm's economic costs (explicit & implicit), any economic profit (also known as pure profit or residual) goes to the entrepreneur
  • An economic profit is not a cost as it is a return in excess of normal profit that is required in order to retain entrepreneur in particular line of production


Short-Run and Long-Run
  • Plant Capacity; the size of the factory building, the amount of machinery and equipment, and other capital resources
  • Fixed Plant (short run) - The period that is too brief for a firm to alter its plant capacity, but long enough for a change in the degree to which the plant is used. In this period, the firm's capacity is invariable, or fixed, but it can use the existing capacity more or less intensively to vary its output.
    • For example: If SAMSUNG hires 100 extra workers to make more televisions, we are talking about the short run.
  • Variable Plant (long run)- This is a period long enough for the firm to adjust the quantities of all resources that it employs, including the plant capacity. This is included in the long run because adjusting factors such as plant number or equipment take a relatively longer time to respond to. From the industry's viewpoint, the long run also includes enough time for firms to exit or enter the industry.
    • For example: If SAMSUNG builds new production facilities and installs new equipment, we are talking about the long run.



Brandnamecommercial
Brandnamecommercial 		Latest page update: made by Brandnamecommercial , Apr 15 2008, 11:12 PM EDT (about this update About This Update Brandnamecommercial Edited by Brandnamecommercial

5 words added
3 words deleted

view changes
- complete history)
Keyword tags: None
More Info: links to this page

Threads for this page

There are no threads for this page.  Be the first to start a new thread.