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PRODUCTION AND COSTS Just as there are 2 sides to a market, a buying side and selling side, there are 2 sides to a firm: a cost side and a revenue side. This chapter looks principally at the cost side. Cost connotes sacrifice; and sacrifices can be made, and alternatives can be forfeited, without money changing hands. EXPLICIT COST AND ImPLICIT COST Opportunity cost is a measure of what is given up when one action is taken instead of another. “What is given up” may either be explicit or implicit; hence, opportunity costs may be either explicit costs or implicit costs Explicit Costs A cost that is incurred when an actual (monetary) payment is made Implicit Costs A cost that represents the value of resources used in production for which no actual (monetary) payment is made ECONOMIC PROFIT AND ACCOUNTING PROFIT Economic Profit Is the difference between TR and Total opportunity cost, including both its explicit and implicit components. Economic profit = TR - total opportunity cost Accounting Profit Is the difference between TR and explicit costs Accounting profit = TR - explicit cost Differentiating between Economic and Accounting Profit Assume A has a job that pays $70,000 a year and that he quit this job to start his own business. TR from the business = 140,000 and explicit cost = 60,000
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Accounting profit = 90,000 Economic profit = 140,000 - 130,000 = 10,000 ZERO ECONOMIC PROFIT IS NOT AS BAD AS IT SOUNDS Economic profit is usually lower (never higher) than accounting profit. In economics, a firm that makes zero economic profit is said to be earning a normal profit Normal Profit A firm that earns normal profit is earning revenues equal to its total opportunity costs. This is the level of profit necessary to keep resources employed in that particular firm Sunk Cost A cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered. E.g. license PRODUCTION AND COSTS IN THE SHORT RUN Production involves costs and takes time to complete. In other word, there is a link between production, costs and time. The production of a good requires factors of production or inputs;
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This note was uploaded on 01/28/2011 for the course ECON 1 taught by Professor Sm during the Spring '10 term at Laney College.

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