l8 - EC 1 UCLA Dr. Bresnock Lecture 8 Opportunity Costs -...

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EC 1 UCLA Dr. Bresnock Lecture 8 Opportunity Costs -- value of the next best alternative. (Remember production possibilities curve description.) Explicit Costs -- monetary payments for resources that 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 that remains after deducting these four categories of resource payments is the “pure economic profit.” Technically the “normal” profits that are the payment to the entrepreneurial are an implicit cost. Thus, since accountants count only explicit costs prior to determining their “profits,” accountants’ profit figures lump “normal” and “pure” economic profit together. Diagram 1 Economic vs. Accounting Profits
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EC 1 Lecture 8 Dr. Bresnock 2 Note : Production costs are distinguished between short-run and long-run costs. The short-run is defined as a time period too short to allow a firm to alter its plant capacity but long enough to allow for more or less intensive use of existing plant capacity. i.e. In the short-run, the existing
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This note was uploaded on 05/20/2010 for the course ECON 180-004-20 taught by Professor Bresnock during the Winter '09 term at UCLA.

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l8 - EC 1 UCLA Dr. Bresnock Lecture 8 Opportunity Costs -...

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