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2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 10
Module 52

4. What You Will Learn in this Module
Explain the difference between explicit and implicit costs and their importance in decision making
Describe the different types of profit, including economic profit, accounting profit, and normal profit
Calculate profit
What You Will Learn in this Module
Section 10 | Module 52

5. Explicit Versus Implicit Costs
An explicit cost is a cost that involves actually laying out money.
An implicit cost does not require an outlay of money; it is measured by the value, in dollar terms, of the benefits that are forgone.
Section 10 | Module 52

6. Opportunity Cost of an Additional Year of School
Section 10 | Module 52

7. Accounting Profit Versus Economic Profit
The accounting profit of a business is the business’s revenue minus the explicit costs and depreciation.
The economic profit of a business is the business’s revenue minus the opportunity cost of its resources. It is often less than the accounting profit.
A firm’s resources are land, labor, capital and entrepreneurial ability.
Opportunity cost for a firm would be best described as what else a firm could do with their land (rent it out or use it), labor (organization of people), capital (update software or buy new computers), and entrepreneurial ability.
Section 10 | Module 52

8. Capital
The capital of a business is the value of its assets—equipment, buildings, tools, inventory, and financial assets.
The implicit cost of capital is the opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way.
Section 10 | Module 52

9. Profits at Babette’s Cajun Café
Section 10 | Module 52

10. Normal Profit
A positive economic profit indicates that the current use is the best use of resources.
A negative economic profit indicates that there is a better alternative use for resources.
A zero economic profit is also called a normal profit.
A firm earning a normal profit is earning just enough to keep the resources it employs in their current activity.
Section 10 | Module 52

11. F Y I
Farming in the Shadow of Suburbia
In 1880, more than half of New England’s land was farmed; by 2006, the amount was down to 10%.
The remaining farms of New England are mainly located close to large metropolitan areas.
Farmers get high prices for their produce from city dwellers who are willing to pay a premium for locally-grown, extremely fresh fruits and vegetables.
Maintaining the land instead of selling it to property developers constitutes a large implicit cost of capital.
Section 10 | Module 52

12. Summary
The cost of using a resource for a particular activity is the opportunity cost of that resource.
Some opportunity costs are explicit costs; they involve a direct payment of cash.
Other opportunity costs, however, are implicit costs; they involve no outlay of money but represent the inflows of cash that are forgone.
Companies use capital and their owners’ time. So companies should base decisions on economic profit, which takes into account implicit costs such as the opportunity cost of the owners’ time and the implicit cost of capital.
A normal profit is the amount needed to keep resources employed in the business – to keep the business in business.
Section 10 | Module 52