Assignment:
Economic Costs
How do we define economic costs? Provide an example.
Explicit and Implicit Costs
Economic costs can be explicit or implicit.
To make the distinction, consider following example that resembles, but is slightly different from, the one in textbook.
Suppose that you work as a sales rep for a company that sells picture frames and make $30,000. Over time, you develop skills in this line of work and grow confident that you can run your own business. The startup requires a one-time investment, an amount you pay from your savings, which used to earn interest income of $2,000. You rent space for $6,000 and hire office staff for $25,000. Finally, it costs $45,000 in labor, materials, and utilities to produce the frames and you earn total revenues of $170,000 from sales.
Explicit costs
How do we define explicit costs? In our example, what is the total amount of explicit costs?
Provide a breakdown of explicit cost items and explain why each is considered explicit.
Accounting Profit
How do we define accounting profit? In our example, what is the amount of accounting profit?
Implicit costs
How do we define implicit costs? In our example, what is the total amount of implicit costs? In considering implicit costs, you may disregard normal profit (foregone entrepreneurial income).
Provide a breakdown of implicit cost items and explain why each is considered implicit.
Economic Profit
How do we define economic profit? In our example, what is the amount of economic profit?
Compare economic profit to accounting profit. Which of the two is larger? Explain why.
Short Run and Long Run
In discussing costs of production, it helps to distinguish between short run and long run.
Short Run: Fixed Plant
How do we define short run?
Of main resource categories (i.e. labor, raw materials, plant, and physical capital), which are variable in the short run? Which are fixed in the short run?
Long Run: Variable Plant
How do we define long run?
Of main resource categories (i.e. labor, raw materials, plant, and physical capital), which are variable in the long run? Which are fixed in the long run?