Answer to Question #96484 in Microeconomics for Keke

Question

(a) Why do economists look at implicit costs?

(b) Look at two businesses (one big and one small) and for each identify what might be their implicit costs. Be specific!

Answer 1

Implicit cost or imputed cost - the opportunity costs of the company associated with the use of its own resources for the production of products. For example, if a company occupies a building that is its property, it refuses the possibility of renting it out. Thus, implicit costs represent the loss of income that could have been obtained by renting (or selling) the resources of the company.

Consider the internal costs of an example of a small bakery, the owner of which is behind the counter. The owner of such a store does not pay himself wages for his work. If, in addition, he uses the premises belonging to him, then he also bears the costs associated with the missed opportunity to lease this premises and receive rent. Using his own money to purchase bakery products, the owner loses interest on his money capital. The owner of the store could also realize his abilities for entrepreneurship in another field of activity.

Also, for comparison, we give an example of a car assembly plant. This enterprise is characterized by a large area of ​​occupied land, which leads to a loss of funds from the transfer of this land for rent to agricultural producers.

This enterprise has a certain set of equipment, for example, for assembling gasoline engines, thereby missing out on the possibility of producing electric cars.