Learning Objectives:

Production Decisions and Costs in the Short Run

LO1: Understand how and why economists measure costs differently from accountants and distinguish between the accountants’ and economists’ views of profits

LO2: Understand the crucial relationship between productivity and costs

CHAPTER 6

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Explicit and Implicit Costs

Explicit Costs • a cost that is actually paid out in money

Implicit Costs • a cost that does not require an actual expenditure

of money

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LO1

Explicit and Implicit CostsProfit and Loss Statement

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LO1

Total Revenue: Cash sales (excluding sales tax) $20 000Explicit Costs: Rent $1500

Materials and Supplies 4200Utilities 1000Hired labour 10 000Depreciation on equipment 500

Total Explicit Costs: 17 200Accounting Profit: 2 800Implicit Costs: Opportunity costs of $96 000

put into business 800Labour put in by owners 4000

Total Implicit Costs: 4 800Total Explicit and Implicit Costs: 22 000Economic Profit or (Loss): (2 000)

Accounting v Economic Profit

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LO1

Accounting profit total revenue total explicit costs

Economic profit total revenue total costs (including implicit and explicit costs)

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LO1

Accounting v Economic Profit

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LO1

Normal Profit • the minimum profit that must be earned to keep

the entrepreneur in that type of business

Economic Profit • revenue over and above all costs, including

normal profits

Sunk Cost • the historical costs of an asset that are

unrecoverable

Self-Test

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Abdi recently gave up a job that paid $1500 a month to open up his own convenience store. He works full time in the store which had total revenue of $105 000 last year. His total (explicit) costs amounted to $65 000. He reckons his store is now worth $200 000 and if he were to sell it and invest the proceeds in his dad’s supermarket he would earn an 8 percent annually.

What is Abdi’s economic profit during the year?

LO1