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Explicit Costs

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EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs:

Economic Cost: the monetary value of all inputs used in a particular activity or enterprise over a given period. Economic costs reflect the opportunity cost of resources. Explicit Costs: paid directly in money - money costs. A firm incurs explicit costs when it pays for a factor of production at the same time it uses it. • Explicit Cost = payments by a firm to purchase the service of productive resources (wages, interest, rent, capital)

Implicit Costs: measured in units of money, but are not paid for directly in money. The costs of nonpurchased inputs, to which a cash value must be imputed because the inputs are not purchased in a market transaction. A firm incurs implicit costs when it uses capital, inventories or owner’s resources. • Implicit Costs = opportunity costs associated with a firm’s use of resources that it owns (wages foregone by owner, interest rates loss through purchases)

Accounting Costs: Measures the explicit costs of operating a business - RESULTS FROM PURCHASES OF INPUT SERVICES. Economic Profit: the difference between the total revenue and the cost of all inputs used by a firm over a given period. It is the TR - OC. OC are the explicit and implicit costs of the best alternative actions forgone. (TR-TC) From now on, if I refer to “profit” that is referring to economic profit. B. • • • • • • • • • Production and Costs:

COST CURVES: Fixed Costs (TFC) = costs that do not vary with output (present even when output, q, = 0) Variable Costs (TVC) = costs that vary with the rate of output Total costs (TC) = TFC + TVC Average Variable Cost (AVC) = total variable cost/ number of units produced Average Fixed Cost (AFC) = fixed costs/ output (units produced) Average Total Cost (ATC) = total cost (variable and fixed) / number of units produced Marginal Cost...

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