Lecture 8

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

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
EC 1 UCLA Dr. Bresnock Lecture 8 Opportunity Costs -- value of the next best alternative. (Remember production possibilities curve description.) Explicit Costs opportunity costs of 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 Total Revenue Explicit Cost Total Cost (red) Economic Profit Normal Profit -> Entrepreneur Interest -> Capital Rent -> land Wages -> Labor Accounting Profit Interest -> Capital Rent -> land Wages -> Labor Implicit Cost
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
EC 1 Lecture 8 Dr. Bresnock 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
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 10

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

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online