Chapter 9
Economic cost
Economic costs = explicit cost + implicit cost.
Accounting profit = total explicit cost – total sales revenue.
Payments a firm must make, or incomes it must provide to resource suppliers to
attract those resources away from their best alternative production opportunities.
Explicit cost:
are opportunity costs, because every monetary payment used to purchase
outside resources necessarily involves forgoing the best alternatives that could
have been purchased with the money.
Explicit costs are the monetary payments a firm makes to those who provide the
factors or inputs to production. You don’t own this costs. These are the cost you
pay for others, like wages or other cost you pay to the outside.
The following would incur an explicit cost:
Utility usage;
Raw materials;
Labor/salary.
Explicit costs are the monetary payments made to the owner of:
Capital;
Labor;
Resources;
Land.
Implicit costs:
Money payments the self-employed resources could have earned in their best
alternative employment.
You do own this cost. Like you are a table-making firm and you have your oak
forest and those oaks turn into tables. The oak forest has a market value of 1500,
you could have sold the land to someone else, but instead you cut the forest and
make it into tables.
Assuming technology and production techniques are fixes and cannot change, if
beyond some point of production, a firm experiences declining units of additional
output with each additional unit of labor input, then the firm is experiencing law
of diminishing marginal returns.
Implicit costs are the firm’s opportunity costs of using its self-owned , self-
employed resources.
(Implicit costs are intangible and not obvious costs associated with using self-
owned resources.)
The following are examples of implicit costs:
Forgone rent;
Forgone wages;
Forgone entrepreneur income;
Forgone interest.
, If you quit your job to start your own business, your forgone wages from your
former job becomes part of the opportunity costs (implicit cost) of your business.
What types of costs do firms incur when producing products:
Implicit and explicit costs.
Remember explicit and implicit cost are opportunity costs.
Accounting and economic profit
Economic or pure profit = Total revenue – explicit – implicit.
Accounting profit = total explicit cost – total sales revenue.
Economic costs = explicit cost + implicit cost.
Accounting:
Your accounting profit overstates the economic success of your business because
it ignores your implicit costs. Success is not ‘having a total sales revenue that
exceeds total explicit costs’. Measure of success is doing as well as you possibly
can- that making more with what you do now than if you did something
else(implicit cost). Doing so will indicate whether your business is earning more
money than what you could have earned somewhere else.
Accounting profit is the firm’s total revenue less its explicit costs, whereas
economic profit is the firm’s total revenue less economic costs (explicit and
implicit costs).
Accounting profit is what remains after a firm has paid its explicit costs.
Economic profit will always be smaller than an accounting profit.
Economic:
Making zero economic profit which includes implicit costs such as entrepreneurial
talent, is also known as a normal profit.
The following is not covered when an entrepreneur’s economic profit is zero:
Pure profit.
By subtracting all of your economic costs from your revenue, you determine how
your current business venture compares with your best alternative business
venture. Example:
That fact that you are generating an economic profit of 24.000 euros means that
you are make 24.000 euros more than you could expect to make in your best
alternative venture. In the contrast if you would make an economic loss. Means
you are doing worse in your current venture than you could have done in your
alternative venture. As result, you wish to switch to other alternative.
Economic cost
Economic costs = explicit cost + implicit cost.
Accounting profit = total explicit cost – total sales revenue.
Payments a firm must make, or incomes it must provide to resource suppliers to
attract those resources away from their best alternative production opportunities.
Explicit cost:
are opportunity costs, because every monetary payment used to purchase
outside resources necessarily involves forgoing the best alternatives that could
have been purchased with the money.
Explicit costs are the monetary payments a firm makes to those who provide the
factors or inputs to production. You don’t own this costs. These are the cost you
pay for others, like wages or other cost you pay to the outside.
The following would incur an explicit cost:
Utility usage;
Raw materials;
Labor/salary.
Explicit costs are the monetary payments made to the owner of:
Capital;
Labor;
Resources;
Land.
Implicit costs:
Money payments the self-employed resources could have earned in their best
alternative employment.
You do own this cost. Like you are a table-making firm and you have your oak
forest and those oaks turn into tables. The oak forest has a market value of 1500,
you could have sold the land to someone else, but instead you cut the forest and
make it into tables.
Assuming technology and production techniques are fixes and cannot change, if
beyond some point of production, a firm experiences declining units of additional
output with each additional unit of labor input, then the firm is experiencing law
of diminishing marginal returns.
Implicit costs are the firm’s opportunity costs of using its self-owned , self-
employed resources.
(Implicit costs are intangible and not obvious costs associated with using self-
owned resources.)
The following are examples of implicit costs:
Forgone rent;
Forgone wages;
Forgone entrepreneur income;
Forgone interest.
, If you quit your job to start your own business, your forgone wages from your
former job becomes part of the opportunity costs (implicit cost) of your business.
What types of costs do firms incur when producing products:
Implicit and explicit costs.
Remember explicit and implicit cost are opportunity costs.
Accounting and economic profit
Economic or pure profit = Total revenue – explicit – implicit.
Accounting profit = total explicit cost – total sales revenue.
Economic costs = explicit cost + implicit cost.
Accounting:
Your accounting profit overstates the economic success of your business because
it ignores your implicit costs. Success is not ‘having a total sales revenue that
exceeds total explicit costs’. Measure of success is doing as well as you possibly
can- that making more with what you do now than if you did something
else(implicit cost). Doing so will indicate whether your business is earning more
money than what you could have earned somewhere else.
Accounting profit is the firm’s total revenue less its explicit costs, whereas
economic profit is the firm’s total revenue less economic costs (explicit and
implicit costs).
Accounting profit is what remains after a firm has paid its explicit costs.
Economic profit will always be smaller than an accounting profit.
Economic:
Making zero economic profit which includes implicit costs such as entrepreneurial
talent, is also known as a normal profit.
The following is not covered when an entrepreneur’s economic profit is zero:
Pure profit.
By subtracting all of your economic costs from your revenue, you determine how
your current business venture compares with your best alternative business
venture. Example:
That fact that you are generating an economic profit of 24.000 euros means that
you are make 24.000 euros more than you could expect to make in your best
alternative venture. In the contrast if you would make an economic loss. Means
you are doing worse in your current venture than you could have done in your
alternative venture. As result, you wish to switch to other alternative.
