Date post: | 31-Dec-2015 |
Category: |
Documents |
Upload: | melvin-grant |
View: | 218 times |
Download: | 0 times |
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
6-1© 2012 McGraw-Hill Ryerson Limited
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
6-2© 2012 McGraw-Hill Ryerson Limited
LO1
Explicit and Implicit CostsProfit and Loss Statement
6-3© 2012 McGraw-Hill Ryerson Limited
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
6-4© 2012 McGraw-Hill Ryerson Limited
LO1
Accounting profit total revenue total explicit costs
Economic profit total revenue total costs (including implicit and explicit costs)
Accounting v Economic Profit
6-6© 2012 McGraw-Hill Ryerson Limited
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
6-7© 2012 McGraw-Hill Ryerson Limited
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