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costnotes - Notes Types of Economic Costs Opportunity Costs...

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Notes: Types of Economic Costs Opportunity Costs -- value of the next best alternative. (Remember production possibilities curve description.) Explicit Costs -- monetary payments for resources which are external to the firm. i.e. payments for any labor, capital, land and/or entrepreneurial ability which are not owned by the firm. Implicit Costs -- opportunity costs of self-owned, self-employed resources in their next best alternative use. i.e. If I hire myself to run my own business then the implicit cost for my self-employed labor is the salary that I will forgo in the next best alternative job if I were hired by another employer. Note : Economists count all explicit and implicit costs prior to reporting a residual or “pure economic profit.” In other words, economists account for wages paid to labor, interest paid to capital, rent paid to land, and a “normal” profit paid to the entrepreneurial to cover risk, etc. Any residual revenue which remains after deducting these four categories of resource payments is the “pure economic profit.”
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