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“Hey everybody i hope you re doing well. Today. Now. We re gonna take a a look at economic costs as part of our key term series of theory of firm and to remind us of where this fits into the matrix of terms.
We have to learn check out this chart alright. This is the chart of terms that you need to know for the cost section of cost revenue and profit. These are the general terms right and we re operating right here. Economic costs explicit and implicit costs.
If you re looking for short run cost. And more information check out the subsequent videos for all of these terms. So. What does that gonna have at cost mean okay hold on a second you got to think about this one remember we re economists.
We re not accountants. We re not just remember people on the street counting up numbers. We got to think about the next best thing that we could do if we weren t doing the thing. We re doing now so if we are producing coffee cups in our factory.
Guess what we got to take into account all of the costs that it implies that we need to pay. Which are sort of the obvious things right like rent labor. The costs of the materials. We need to make our coffee cups.
But we also got to think about what we re not earning as a result of doing this business. And that s the opportunity costs. Okay so economic costs have to do with the with the cost of producing a good is equal to the opportunity cost of the firm s production or if i read that properly. I would say economic cost the economic cost of producing good is the opportunity cost of the firm s production.
So the explicit costs are the explicit costs are the cost to a firm that involved the direct payment of money that s easy explicit what are you paying for labor. What are you paying for capital. What are you paying for land right those things are obvious the materials you need in order to produce whatever product you are trying to produce. But what a lot of people don t think about who are not economic economists are these implicit costs the implicit costs are the earnings that a firm could have had if it had employed the factors of production in another use or if it had hired out or sold them to another firm hmm.
What does that mean well imagine. If the owner of this coffee. Cup factory that we have was a doctor at clinica alemana. Which is a local.
The it s a local hospital here in santiago chile and this. Doctor you know what she was earning 100000. A year. I don t know what they really make.
But let s just say a hundred thousand dollars a year. So if she s running a coffee cup business. Because that s her dream well the firm must cover the costs of what the cost of what she could have learned her opportunity cause. What she could have earned her opportunity cost had she continued to be a doctor.
So that in that that is obvious right well that s not obvious. But we think about opportunity cost they should be pretty obvious. But also think about what maybe if we built a factory and the factory. If we weren t making coffee cups could be rented out to someone else to make something that they wanted and we could charge.
Twenty thousand dollars a year to rent out that space to somebody else well dude take a look at those two numbers and all of a sudden you realize. It s a hundred thousand dollar opportunity cost that the entrepreneur is giving up by doing this instead of being a doctor. Plus. Once the building s built.
We could earn another twenty thousand dollars by renting out to another firm and all of a sudden. You realize that the implicit costs here are much greater or better. Said. The economic costs are much greater than you might expect because of the implicit costs.
So this firm must earn a hundred and twenty thousand dollars above its explicit cost in order to be economically profitable. Which gets to another term. Okay you really important that you understand that in economics. We talked about the total costs of production and that includes the opportunity costs all right my friends so i hope you find that to be helpful.
Economic costs are a critical piece of the puzzle of the economic terms. You need to know in order to be fluent and econ all right my friends. I hope you found this video to be helpful and we ll talk ” ..
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