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*
*
 cost of utilizing economic resources in
production, including opportunity cost.
Opportunity Cost
- cost associated with opportunities that are
forgone when a firm’s resources are not put to
their best alternative use.
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐶𝑜𝑠𝑡 = 𝐸𝑥𝑝𝑙𝑖𝑐𝑖𝑡 𝐶𝑜𝑠𝑡 + 𝐼𝑚𝑝𝑙𝑖𝑐𝑖𝑡 𝐶𝑜𝑠𝑡
*
Explicit Cost
- a cost that involves spending money
- requires an outlay of money
Example: paying wages to workers
Implicit Cost
 a non-monetary opportunity cost, including
normal profit to the entrepreneur
do not require a cash outlay
*Example:
the opportunity cost
of the owner’s time
*
•Suppose you are earning $22,000 a year as a
sales representative for a T-shirt manufacturer.
•And you invest $20,000 of savings that have been
earning you $1000 per year.
•But, at some point you decide to open a retail
store of your own to sell T-shirts.
•And you decide that your new firm will occupy a
small store that you own and have been renting out
for $5,000 per year.
•You hire one clerk to help you in the store, paying
her $18,000 annually.
•Additional Information:
Cost of T-Shirts --------------------------- $40,000
Utilities Expenses ------------------------ $ 5,000
oYour entrepreneurial talent is worth $5,000
annually in other business endeavors of similar
scope.
A year after you open the store, you total up your
accounts and find the following:
Total sales revenue ------------ $120,000
Cost of T-shirts ---------- $40,000
Clerk’s salary ------------- 18,000
Utilities -------------------- 5,000
Total (explicit) costs --------------- 63,000
Accounting profit ----------------------- 57,000
Accounting profit ----------------------- $57,000
Forgone interest ------------ $1,000
Forgone rent --------------- 5,000
Forgone wages -------------- 22,000
Forgone entrepreneurial income ---- 5,000
Total implicit costs --------------------------- 33,000
Economic profit -------------------------------- 24,000
Considering the implicit costs:
*
Accounting profit
- total revenue minus total explicit costs
Economic profit
- total revenue minus economic costs or the
total costs (including explicit and implicit
costs)
“Accounting profit ignores implicit costs, so it’s
higher than economic profit.”
Profits to an
Economist
Profits to an
Accountant
Economic Profit
Implicit cost
( including a normal
profit)
Explicit cost
Accounting Profit
Accounting costs
( explicit costs only)
TotalRevenue
Economic(opportunity)costs
*
Short Run
a period of time where one factor of
production is fixed (capital stock such as
plant) and all others are variable such as
labor, materials, and other resources to that.
has a fixed plant capacity size.
Long Run
a time period where all factors of
production, even the capital stock such as
plant, are variable
has a variable plant capacity size.
*
• If a firm hires 100 extra workers for
one of its commercial airline plants
or adds an entire shift of workers.
• But, if it adds a new production
facility and install more equipment.
- Short-Run
- Long-Run

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Cost of production

  • 1. *
  • 2. *  cost of utilizing economic resources in production, including opportunity cost. Opportunity Cost - cost associated with opportunities that are forgone when a firm’s resources are not put to their best alternative use. 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐶𝑜𝑠𝑡 = 𝐸𝑥𝑝𝑙𝑖𝑐𝑖𝑡 𝐶𝑜𝑠𝑡 + 𝐼𝑚𝑝𝑙𝑖𝑐𝑖𝑡 𝐶𝑜𝑠𝑡
  • 3. * Explicit Cost - a cost that involves spending money - requires an outlay of money Example: paying wages to workers
  • 4. Implicit Cost  a non-monetary opportunity cost, including normal profit to the entrepreneur do not require a cash outlay *Example: the opportunity cost of the owner’s time
  • 5. * •Suppose you are earning $22,000 a year as a sales representative for a T-shirt manufacturer. •And you invest $20,000 of savings that have been earning you $1000 per year. •But, at some point you decide to open a retail store of your own to sell T-shirts.
  • 6. •And you decide that your new firm will occupy a small store that you own and have been renting out for $5,000 per year. •You hire one clerk to help you in the store, paying her $18,000 annually. •Additional Information: Cost of T-Shirts --------------------------- $40,000 Utilities Expenses ------------------------ $ 5,000 oYour entrepreneurial talent is worth $5,000 annually in other business endeavors of similar scope.
  • 7. A year after you open the store, you total up your accounts and find the following: Total sales revenue ------------ $120,000 Cost of T-shirts ---------- $40,000 Clerk’s salary ------------- 18,000 Utilities -------------------- 5,000 Total (explicit) costs --------------- 63,000 Accounting profit ----------------------- 57,000
  • 8. Accounting profit ----------------------- $57,000 Forgone interest ------------ $1,000 Forgone rent --------------- 5,000 Forgone wages -------------- 22,000 Forgone entrepreneurial income ---- 5,000 Total implicit costs --------------------------- 33,000 Economic profit -------------------------------- 24,000 Considering the implicit costs:
  • 9. * Accounting profit - total revenue minus total explicit costs Economic profit - total revenue minus economic costs or the total costs (including explicit and implicit costs) “Accounting profit ignores implicit costs, so it’s higher than economic profit.”
  • 10. Profits to an Economist Profits to an Accountant Economic Profit Implicit cost ( including a normal profit) Explicit cost Accounting Profit Accounting costs ( explicit costs only) TotalRevenue Economic(opportunity)costs
  • 11. * Short Run a period of time where one factor of production is fixed (capital stock such as plant) and all others are variable such as labor, materials, and other resources to that. has a fixed plant capacity size.
  • 12. Long Run a time period where all factors of production, even the capital stock such as plant, are variable has a variable plant capacity size.
  • 13. * • If a firm hires 100 extra workers for one of its commercial airline plants or adds an entire shift of workers. • But, if it adds a new production facility and install more equipment. - Short-Run - Long-Run