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
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