Economic%20Costs

Economic%20Costs - In this case, it covers more than the...

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Economic Costs = Explicit costs + Implicit costs Accounting + Opportunity Costs Costs Accounting costs include: Opportunity costs include: Rents Annual salary sacrificed by entrepreneur to run his own business Leases Foregone interest earnings on personal savings. Entrepreneur used it as “start-up” money Property taxes Foregone rent on personal property owned by entrepreneur. Now uses it for his own plant. Distribution costs Administrative Costs Advertising, Marketing Costs Labor costs Raw materials, supplies, parts Utilities Anticipated Accounting Profits: Anticipated Opportunity costs: Management Fees $140,000 Foregone salary from old job: $56,000 Misc. Revenues 12,000 Foregone interest earnings Office rent - 36,000 from savings of $80K @ 8%: 6,400 Other office expenses - 18,000 Staff wages - 24,000 Net Total: $74,000 Net Total: - $ 62,400 Economic Profits = $ 74,000 - $62,400 = $11,600 (this profit measures the projected monetary gain of starting one’s own business.
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Unformatted text preview: In this case, it covers more than the projected accounting costs and all opportunity costs of the owners time and personal resources.) 3 case scenarios can arise when comparing total revenues to economic costs: 1. If TR > Economic costs, then have Economic Profit When Total Revenues exceeds all accounting costs plus opportunity costs, an economic or pure or excess profit has been realized. 2. If TR = Economic costs, then have Normal Profit or a Normal Return on the Business Investment. When Total Revenues just covers or equals the sum of all accounting and opportunity costs, then a normal profit has been realized. That is, the owner has been able to recover all of his opportunity costs as well as his normal financial obligations. 3. If TR < Economic costs, then have a loss. The owner is not making a normal return on his business investment....
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Economic%20Costs - In this case, it covers more than the...

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