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    ECONOMIC COSTSEconomic Costs or

    Opportunity CostsForgoing the opportunityto produce alternative

    goods and services

    Explicit CostsDirect payment

    Implicit CostsOpportunity cost of the owner of afirm.

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    Explicit cost:

    An explicit cost is a direct payment made to others in thecourse of running a business, such as wage, rent and materials

    Implicit cost:

    In economics, an implicit cost, also called an imputed cost,

    implied cost, ornotional cost, is the opportunity cost equal towhat a firm must give up in order to use factors which it neither

    purchases nor hires.

    These are intangible costs that are not easily accounted for.

    For example, the time and effort that an owner puts into themaintenance of the company rather than working on expansion.

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    Economic or Pure Profits

    Economic

    Profit

    Total

    RevenueEconomic Cost

    ECONOMIC COSTS

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    Economic

    Profit

    Implicit costs

    (including a

    normal profit)

    Explicit

    Costs

    Accounting

    costs (explicit

    costs only)

    Accounting

    Profit

    Economic(opportunity)Costs

    T

    O

    TA

    L

    R

    EV

    E

    N

    U

    E

    Profits to anEconomist Profits to anAccountant

    ECONOMIC COSTS

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    SHORT RUN AND LONG RUN

    Accounting:Short and long runisbased upon annual

    chronology.Economics:Short runhas fixed plantcapacity size.Long runhas variable

    plant capacity size.

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    Average Product (AP)

    Total Product (TP)Marginal Product (MP)

    SHORT-RUN PRODUCTIONRELATIONSHIPS

    Marginal Product =Change in TotalProduct

    Change in LaborInput

    Average Product =

    TotalProductUnits of Labor

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    Law of Diminishing Return

    SHORT-RUN PRODUCTIONRELATIONSHIPS

    TotalProduct,TP

    Quantity of Labor

    AverageProduct,A

    P,and

    MarginalProduc

    t,MP

    Quantity of Labor

    Total Product

    Marginal

    Product

    Average

    Product

    Increasing

    Marginal

    Returns

    http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/origin_of_the_idea.html
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    Law of Diminishing Return

    SHORT-RUN PRODUCTIONRELATIONSHIPS

    TotalProduct,TP

    Quantity of Labor

    AverageProduct,AP,and

    MarginalProduc

    t,MP

    Quantity of Labor

    Total Product

    Marginal

    Product

    Average

    Product

    Diminishing

    Marginal

    Returns

    http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/origin_of_the_idea.html
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    Law of Diminishing Return

    SHORT-RUN PRODUCTIONRELATIONSHIPS

    TotalProduct,TP

    Quantity of Labor

    AverageProduct,AP,and

    MarginalProduc

    t,MP

    Quantity of Labor

    Total Product

    Marginal

    Product

    Average

    Product

    Negative

    Marginal

    Returns

    http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/origin_of_the_idea.htmlhttp://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/origin_of_the_idea.html
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    Fixed CostsTotal Fixed Costs

    Average Fixed Costs =Total Fixed Costs

    Quantity

    Variable Costs

    Total Variable Costs

    Average Variable Costs =Total Variable Costs

    Quantity

    SHORT-RUN PRODUCTION COSTS

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    Total CostTotal Fixed and Variable Costs

    Average Total Cost =Total Costs

    Quantity

    Marginal Cost

    Marginal Cost = Change in Total CostsChange in Quantity

    SHORT-RUN PRODUCTION COSTS

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    13/22Marginal Cost= MC

    Total Fixed Costs= TFCTotal Variable Costs= TVC

    Average Variable Costs= AVC

    Total Costs= TC

    Average Total Costs= ATC

    Average Fixed Costs= AFC

    Summary of DefinitionsSHORT-RUN PRODUCTION COSTS

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    SHORT-RUN COSTS GRAPHICALLY

    Quant i ty

    Cos

    ts(

    do

    llars

    )

    TC

    TVC

    TFC

    Combining TVCWith TFC to getTotal Cost

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    SHORT-RUN COSTS GRAPHICALLY

    Quant i ty

    Cos

    ts(

    do

    llars

    )

    AFC

    AVC

    ATC

    MCPlotting Average and

    Marginal Costs

    http://highered.mcgraw-hill.com/sites/0072819359/student_view0/chapter22/interactive_graphs.html
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    PRODUCTIVITY AND COST CURVES

    Cos

    ts(

    do

    llars

    )

    Average

    Pro

    du

    ctan

    d

    Marg

    ina

    lPro

    duc

    t

    Quant ity o f labor

    Quant ity of outpu t

    MP

    AP

    MCAVC

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    LONG-RUN PRODUCTION COSTS

    All such plant capacitiescan be plotted.

    For every plant capacitysize...there is a short-run ATC

    curve.

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    LONG-RUN PRODUCTION COSTS

    UnitCo

    sts

    Output

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    LONG-RUN PRODUCTION COSTS

    UnitCo

    sts

    Output

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    LONG-RUN PRODUCTION COSTS

    The long-run ATCjust envelopesall of the short-run ATC curves.

    UnitCo

    sts

    Output

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    LONG-RUN PRODUCTION COSTS

    UnitCo

    sts

    Output

    long-run ATC

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