Section 10, Module 52 (Microeconomics)

Implicit Cost

A cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone. An implicit cost occurs when one foregoes an alternative action but does not make an actual payment.

Normal profit

Economic profit equal to zero. It is an economic profit just high enough to keep a firm engaged in its current activity.

Depreciation means...?

Reduction in value

Sean builds a cabinet. He spends 2 hours building the cabinet. He could have been working instead and normally makes $25/hour at his job. Since he was building a cabinet he wasn't paid for this time. The materials to make the cabinet cost him $20. What is his implicit cost? His explicit cost? And his total cost?

Implicit cost = $25/hr * 2 = $50 of forgone pay Explicit cost = $20 in materials Total cost = $20 + $50 = $70 Total Costs

An economic profit equal to zero means....?

It means that the firm could not do any better using its resources in any alternative activity.

Accounting profit

The business's total revenue minus the explicit cost and depreciation. total revenue - explicit costs and depreciation

Implicit Cost + Explicit Cost = ?

Total Cost

You sell T-shirts at your school's football games. Each shirt costs $5 to make and sells for $10. Each game lasts two hours and you sell 100 shirts per game. You could always be earning $8 per hour at your other job. Which of the following is correct? Your accounting profit from selling shirts is a. $1,000 and your economic profit is $500. b. $500 and your economic profit is $1,000. c. $500 and your economic profit is $484. d. $484 and your economic profit is $500. e. $500 and your economic profit is also $500.

c. $500 and your economic profit is $484.

Explicit Cost

A cost that involves actually laying out money. An Explicit cost is an easy accounted cost, such as wage, rent and materials. It can be transacted in the form of money payment and is lost directly, as opposed to monetary implicit costs. Explicit cost are those which the entrepreneur has to pay from his own pocket. payments that firms make to purchase (resources like land and labor, and products from other firms) Explicit Costs require an outlay of money by the firm. For instance, the explicit cost of a night at the movies includes the moviegoer's ticket and soda, but the implicit cost includes the pay he would have earned if he had chosen to work instead.

Economic profit (profit)

The business's total revenue minus the opportunity cost of its resources. It is usually less than the accounting profit. The difference between the total revenue and the cost of all inputs used by a firm over a given period. It is the TR - OC. OC are the explicit and implicit costs of the best alternative actions forgone. (TR-TC) The difference between a firm's total revenue and the sum of its implicit and explicit costs.

The price of the output times the quantity sold, p*q = ? MINUS The cost of all the inputs used to produce its output = ? is equal to ____________________?

Total Revenue (The price of the output times the quantity sold, p*q) - Total Cost (The cost of all the inputs used to produce its output) = a firm's profit profit = total revenue - total cost

Sunny owns and operates Sunny's Sno Cone Stand. Use the data in the table provided to answer the questions below. Sunny's Sno Cone Stand: January price of Sno Cone: $2 Snow cones sold: 2,000 Explicit cost: $400 Depreciation: $100 Implicit cost of capital: $200 a. Calculate Sunny's Sno Cone Stand's total revenue for January. b. Calculate Sunny's Sno Cone Stand's accounting profit for January. c. What additional information would Sunny need in order to determine whether or not to continue operating Sno Cone Stand? d. Explain how Sunny would determine whether or not to continue operating the business on the basis of these numbers.

Total revenue = $4,000 (p*q) Explicit cost = $400 Depreciation = $100 Accounting profit = $4,000 - $500 = $3,500 Economic profit: $4,000 - $700 = $3,300 a. $4,000 b. $3,500 c. Sunny would need what her opportunity cost would be and what else she could do instead of running the Sno Cone Stand (getting a job someplace else, for example). She would need to know the opportunity cost of her time. d. Sunny needs to calculate her economic profit. She could determine whether or not she should continue operating the business if she makes at least normal profit. Her economic profit is her total revenue minus the explicit and implicit costs, or her accounting profit minus the implicit cost of capital. Her economic profit would be $3,300. This means if her opportunity cost of her time is less than or equal to $3,300, then she will make at least normal profit and can continue operating the Sno Cone Stand.

a. Suppose you are in business earning an accounting profit of $25,000. What is your economic profit if the implicit cost of your capital is $2,000 and the opportunity cost of your time is $23,000? b. What does your answer to part a tell you about the advisability of devoting your time and capital to this business?

a. Implicit cost = $2,000 + $23,000 = $25,000 Account profit = Total Revenue - Explicit Cost - Depreciation = $25,000 Economic profit = Total revenue - Explicit cost - Depreciation - Implicit cost = Accounting profit - Implicit cost = $25,000 - $25,000 = 0 Economic profit = zero b. An economic profit of zero is considered a "normal profit." The resources devoted to this business could not earn more if used in the next best activity. This is just enough profit to keep you in this business with no regrets.

Karma and Don run a furniture-refinishing business from their home. Which of the following represent an explicit cost of the business and which represent an implicit cost? a. supplies such as paint stripper, varnish, polish, sandpaper, and so on b. basement space that has been converted into a workroom c. wages paid to a part-time helper d. a van that they inherited and use only for transporting furniture e. the job at a larger furniture restorer that Karma gave up in order to run the business

a. Supplies are an explicit cost because they require an outlay of money. b. If the basement could be used in some other way that generates money, such as renting it to a student, then the implicit cost is that money forgone. Otherwise, the implicit cost is zero. c. Wages are an explicit cost. d. By using the van for their business, Karma and Don forgo the money they could have gained by selling it. So use of the van is an implicit cost. e. Karma's forgone wages from her job are an implicit cost.

Your firm is selling 10,000 units of output at a price of $10 per unit. Your firm's total explicit cost is $70,000. Your firm's implicit cost of capital is $10,000, and your opportunity cost is $20,000. a. Calculate total revenue. b. Calculate total implicit cost. c. Calculate your accounting profit. d. Calculate your economic profit. e. What does the value of your economic profit calculated in part d tell you.

a. Total revenue = p*q = 10,000*$10 = $100,000 b. Calculate total implicit cost = $30,000 c. Calculate accounting profit = $30,000 d. Calculate economic profit = $0 Economic profit = Total revenue - (implicit + explicit costs) = explicit $70,000 + implicit cost of capital $10,000 + opportunity cost of $20,000 = $100,000. $100,000 (total revenue) - $100,000 (implicit and explicit costs) = $0 = normal profit e. Because your firm earns normal profit, there is no better alternative use for your resources.

Which of the following is the best definition of accounting profit? Accounting profit equals total revenue minus depreciation and total a. explicit cost only b. implicit cost only c. explicit cost and implicit cost d. opportunity cost e. explicit cost plus opportunity cost

a. explicit cost only

Which of the following is considered when calculating economic profit but not accounting profit? a. implicit cost b. explicit cost c. total revenue d. marginal cost e. All of the above are considered when accounting profit.

a. implicit cost

Which of the following is an implicit cost of going out for lunch? a. The amount of the tip you leave the waiter b. The total bill you charge to your credit card c. The cost of gas to drive to the restaurant d. The value of the time you spent eating lunch e. All of the above

d. The value of the time you spent eating lunch

Which of the following is an implicit cost of attending college? a. tuition b. books c. laptop computer d. lab fees e. forgone salary

e. forgone salary.

A _________ economic profit indicates that there is a better alternative for resources

negative

A _________ economic profit indicates that the current use is the best use of resources.

positive