Costs as Opportunity Costs A firm's cost of production includes all the opportunity costs of making its output of goods and services H arc Inc. items and derived items c ht o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Costs as Opportunity Costs A firm’s cost of production includes all the opportunity costs of making its output of goods and services
Explicit and Implicit Costs A firms cost of production include explicit costs and implicit costs. . Explicit costs involve a direct money outlay for factors of production. iMplicit costs do not involve a direct money outlay H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Explicit and Implicit Costs A firm’s cost of production include explicit costs and implicit costs. uExplicit costs involve a direct money outlay for factors of production. uImplicit costs do not involve a direct money outlay
Economic Profit versus Accounting profit ◆ Economists measure a firm’ s economIc profit as total revenue minus all the opportunity costs(explicit and implicit) Accountants measure the accounting profit as the firms total revenue minus only the firm's explicit costs. In other words, they ignore the implicit costs. H arc Inc. items and derived items c ht o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Economic Profit versus Accounting Profit uEconomists measure a firm’s economic profit as total revenue minus all the opportunity costs (explicit and implicit). uAccountants measure the accounting profit as the firm’s total revenue minus only the firm’s explicit costs. In other words, they ignore the implicit costs
Economic Profit versus Accounting Profit When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. o Economic profit is smaller than accounting profit H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Economic Profit versus Accounting Profit uWhen total revenue exceeds both explicit and implicit costs, the firm earns economic profit. u Economic profit is smaller than accounting profit
Economic Profit versus Accounting profit How an economist How an Accountant Views a Firm Views a firm Economic profit Accounting profit Implicit Revenue costs Revenue Total opportunity costs Explicit Explicit costs costs H arc Inc items and derived items copyright o 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Economic Profit versus Accounting Profit Revenue Total opportunity costs How an Economist Views a Firm Explicit costs Economic profit Implicit costs Explicit costs Accounting profit How an Accountant Views a Firm Revenue