Complete questions by filling the blanks and/or circling (or highlighting) a correct choice.
1. Why are costs important in economics? Differences in using costs from accounting?
Costs are important in economics in determining the optimal (a__________ ) of resources based on what firms are willing to pay, which in turn depends on how much consumers are willing to pay for the products produced by these resources. How an optimal combination of resources is chosen by following the producers' goal of minimization of total economic costs. The "least-cost way of production" results in allocative efficiency. Keep in mind that the producer's goal is to maximize profit and that goal must be consistent with the minimization of costs Costs reflect the market prices of the resources used in production, but also economic costs include the ( o____________ c________ ) of using some resources that may not have an explicit market price. Economists argue that the cost of all resources should be considered when determining the real cost of production.
Whereas the "accounting costs" refers to the ( implicit, explicit ) cost, economists (but not accountants) would count the income forgone in the use of the owner's time as an economic cost, the interest forgone by using one's own funds, and so on. These implicit costs should be counted so one can judge the true economic or opportunity cost of production. If these costs are neglected, then an overallocation of resources could occur because not all of the production costs are being measured.