An economist would draw no such conclusions. The essential economic question is how resources are used in production. This hasn't changed. One unit of labor is still being em- ployed at the factory; now it's simply the owner, not a hired worker. In either case, one unit of labor is not available for the production of other goods and services. Hence, society is still paying $245 for jeans, whether the owners of Low-Rider Jeans write checks in that amount or not. The only difference is that we now have an implicit cost rather than an ex- plicit one. We really don't care who sews jeans-the essential point is that someone (i.e., a unit of labor) does. The same would be true if Low-Rider Jeans owned its own factory rather than rented it. If the factory were owned rather than rented, the owners probably wouldn't write any rent checks. Hence, accounting costs would drop by $100 per day. But the factory would still be in use for jeans production and therefore unavailable for the production of other goods and services. The economic (resource) cost of producing 15 pairs of jeans would still be $245. The distinction between an economic cost and an accounting cost is essentially one be- cween resource and dollar costs. Dollar cost refers to the explicit dollar outlays made by a producer; it's the lifeblood of accountants. Economic cost, in contrast, refers to the value of
An economist would draw no such conclusions. The essential economic question is how resources are used in production. This hasn't changed. One unit of labor is still being em- ployed at the factory; now it's simply the owner, not a hired worker. In either case, one unit of labor is not available for the production of other goods and services. Hence, society is still paying $245 for jeans, whether the owners of Low-Rider Jeans write checks in that amount or not. The only difference is that we now have an implicit cost rather than an ex- plicit one. We really don't care who sews jeans-the essential point is that someone (i.e., a unit of labor) does. The same would be true if Low-Rider Jeans owned its own factory rather than rented it. If the factory were owned rather than rented, the owners probably wouldn't write any rent checks. Hence, accounting costs would drop by $100 per day. But the factory would still be in use for jeans production and therefore unavailable for the production of other goods and services. The economic (resource) cost of producing 15 pairs of jeans would still be $245. The distinction between an economic cost and an accounting cost is essentially one be- cween resource and dollar costs. Dollar cost refers to the explicit dollar outlays made by a producer; it's the lifeblood of accountants. Economic cost, in contrast, refers to the value of
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Please summarize this
Transcribed Image Text:all resources used in the production process; it's the lifeblood of economists. In other words,
economists count costs as
Economic cost = Explicit costs + Implicit costs
As this formula suggests, economic and accounting costs will diverge whenever any factor of
production is not paid an explicit wage (or rent, etc.).
Transcribed Image Text:Economic Cost
An economist would draw no such conclusions. The essential economic question is how many
resources are used in production. This hasn't changed, One unit of labor is still being em-
ployed at the factory; now it's simply the owner, not a hired worker. In either case, one unit
of labor is not available for the production of other goods and services. Hence, society is
still paying $245 for jeans, whether the owners of Low-Rider Jeans write checks in that
amount or not. The only difference is that we now have an implicit cost rather than an eX-
plicit one. We really don't care who sews jeans-the essential point is that someone (i.e., a
unit of labor) does.
The same would be true if Low-Rider Jeans owned its own factory rather than rented it. If
the factory were owned rather than rented, the owners probably wouldn't write any rent
checks. Hence, accounting costs would drop by $100 per day. But the factory would still be
in use for jeans production and therefore unavailable for the production of other goods and
services. The economic (resource) cost of producing 15 pairs of jeans would still be $245.
The distinction between an economic cost and an accounting cost is essentially one be-
tween resource and dollar costs. Dollar cost refers to the explicit dollar outlays made by a
producer; it's the lifeblood of accountants. Economic cost, in contrast, refers to the value of
Expert Solution
Step 1
To summarize above pictures, it is important to know some definitions like :
IMPLICIT COSTS are the costs that are technically not incurred and they can not be measured. The cost of any resources belonging to the owner of the business like capital is the implicit cost.
EXPLICIT COSTS are the costs that are involved in the payment of cash or any other tangible assets like rent, salary and other operating costs are explicit costs.
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