ECONOMIC COSTS
&
SHORT RUN PRODUCTION RELATIONSHIPS
COSTS
• Costs exist because resources are scarce and they have
alternative uses.
• The Economic Cost or Opportunity Cost of any resource
used to produce a good is the value it would have had if
used in an another way.
• This cost can be expressed as the payment or income
that a firm must provide to prevent the resource from
being used alternatively.
EXPLICIT AND IMPLICIT COSTS
• Explicit Costs are the monies firms must pay to obtain a
resource you do not already own, and prevent it from
being used alternatively.
• Implicit Costs are the monies a firm sacrifices when it
uses a resource it already owns rather than what it could
have earned by this resource if supplied to the market.
• Implicit Costs include normal profit.
ACCOUNTING PROFIT AND ECONOMIC PROFIT
• Accounting Profit = Total Revenue – Explicit Costs
• Economic Profit = Total Revenue – (Explicit + Implicit
Costs)
Video on Accounting and Economic Profits
NORMAL PROFIT AS A COST
• The minimum payment entrepreneurial ability must
receive to induce it to perform the entrepreneurial
functions of the firm.
• It is an implicit cost because it must be taken into
account as it is clearly an opportunity cost since the
owner could use his skills and ideas elsewhere.
PAGE 210 QUESTION 4
• Utilize the two tables on page 185.
• The top table highlights explicit costs, which when
subtracted from revenue give us accounting profit.
• The bottom table highlights implicit costs, which when
subtracted from accounting profit, gives us economic
profit.
• Classify the expenses given on page 210 to answer
question 4.
THE SHORT AND LONG RUN PERIODS
• The Short Run is the period of time when producers
can only change some of the quantities and types of
resources employed. (Loblaws or KFC could schedule
more workers for next week if they are busy).
• The Long Run is the period of time when producers can
change all the quantities and resources employed. (If
Loblaws or KFC thinks a new housing development is
being built, they could expand their stores).
PAGE 211 QUESTION 5
• Decipher which of the adjustments in the question are
short-run, and which are long-run.
• Remember, short run changes variable inputs, long-run
changes fixed inputs.
SHORT RUN PRODUCTION RELATIONSHIPS
• Total Product (TP): total quantity of good produced.
• Marginal Product (MP): the extra quantity of a good
produced from adding an additional unit of a resource.
MP = Change in TP / Change in Quantity of Resource
• Average Product (AP): or productivity, is output per unit
of a resource employed. Generally labour.
AP = TP / Quantity of Resource Employed
THE LAW OF DIMINISHING RETURNS
• As successive units of a variable resource (such as
labour) are added to a fixed resource (such as a
factory), the marginal product (MP) of the variable
resource will eventually decrease.
• To solve this problem, you need more fixed resources
or capital equipment.
• Video explaining Law of Diminishing Returns.
PAGE 211 KEY QUESTION 6
• If you have trouble completing the graph, refer to page
191 for quick reference.