University:
College
Course:
College Business
Academic year:

2023
Views:

14

Pages:

1
Author:

anon

Production and costs Economic costs is the opportunity cost of all resources employed by the firm, including the entrepreneurship. There are 2 components of economic costs: implicit and explicit costs. What does the sentences above mean? Lets find outRecalling from previous sections, profit is the difference between a firm’s total revenues and its total costs. Revenues are the income earned from a firm’s sale of its good or service to consumers in the product market. As they want to maximise profits, they would want to maximise revenues and minimize costs. As a result, firms often cut corners. E.g. BP, an oil company with an oil rig “Deepwater Horizon” in the gulf of Mexico burst into flames following the failure of a pressure-release valve on the seabed, 20 April 2010. 100 million gallons of oil was leaked and 2 months after, evidence emerged that cost-cutting decisions made when building the well contributed to its eventual failure. This may seem foolish in retrospect, as the monetary damages BP will have to pay is 4000 times more than the company saved, so why did corporations like BP choose to reduce costs at every opportunity and risk an engineering failure with the lower-cost option? BP made the decision in the best interests of its shareholders at the time, which is legal, but at risk. Costs are the things that need to be given up in order to have something else. This concept is similar to opportunity costs (OC), in which if 1 chooses to buy a burger using 10 bucks, one can’t buy a book for example. Explicit costs are the monetary payments that firms make to the owners of resources (land, labour and capital) it employs in the resource market for its production of output. Implicit costs (also known as the normal profit) are the opportunity costs of entrepreneurs who decide to allocate their time and energy to 1 enterprise instead of seeking other possible economic activities. Short run/ fixed-plant period (SR)- the period of time over which firms cannot acquire additional fixed factors of production (land or capital) to increase production ( or even decrease & change it), but within which labour can be applied to a varying degree in order to change output. Only labour is a variable resource in the SR. Number of firms are fixed in the industry. Long run/ variable-plant period (LR)- firms are able to put into production all factors of production to produce output. All sources are variable in the LR. Firms may enter the market. The more complex idea here is the implicit costs. It refers to the OC faced by the entrepreneur who udnertakes a business venture instead of earning money by hiring his self-owned resources out to another employer. All founders of firms face this costs which represents the foregone wages of the entrepreneur who chooses to use his skills and resources to operate his own enterprise rather than seek employment by someone else. It is also the normal profit, and this must be covered by the firm as it may shutdown if the implied value of the entrepreneur’s talents are not met. The total revenue a firm makes must cover all the total costs to remain in the industry. In this case, the economic profits is 0 and the normal profits are covered.