Deriving long-run average cost curves: factories of fixed size SRAC 1 SRAC 3 SRAC 2 SRAC 4 SRAC 5 LRAC Costs Output O
Deriving long-run average cost curves: choice of factory size Costs Output O Examples of short-run average cost curves
Deriving long-run average cost curves: choice of factory size LRAC Costs Output O
Explicit and Implicit Costs Explicit Costs : The money payment that a firm makes to the outsiders who supply inputs. These are the “out of pocket ” costs. Eg. Salaries, price paid for raw material, components etc.
<ul><li>Implicit Costs : The costs of the “self owned” resources which are employed by the firm and are non – expenditure costs. </li></ul><ul><li>Eg. Salary of the proprietor, interest on the entrepreneur’s own investment etc. </li></ul>
Economic Profit versus Accounting Profit <ul><li>Economists measure a firm’s economic profit as total revenue minus all the opportunity costs (explicit and implicit). </li></ul><ul><li>Accountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs. In other words, they ignore the implicit costs. </li></ul>
Economic Profit versus Accounting Profit <ul><li>When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. </li></ul><ul><ul><li>Economic profit is smaller than accounting profit. </li></ul></ul>
Economic Profit versus Accounting Profit Revenue Total opportunity costs How an Economist Views a Firm Explicit costs Economic profit Implicit costs Explicit costs Accounting profit How an Accountant Views a Firm Revenue
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