1. Learning Objectives: Production Decisions and Costs in the Short Run LO1: Understand how and why economists measure costs differently from accountants and distinguish between the accountants’ and economists’ views of profits LO2: Understand the crucial relationship between productivity and costs CHAPTER 6 6-1© 2012 McGraw-Hill Ryerson Limited

2. Explicit and Implicit Costs Explicit Costs a cost that is actually paid out in money Implicit Costs a cost that does not require an actual expenditure of money 6-2© 2012 McGraw-Hill Ryerson Limited LO1

3. Explicit and Implicit Costs Profit and Loss Statement 6-3© 2012 McGraw-Hill Ryerson Limited LO1 Total Revenue:Cash sales (excluding sales tax) $20 000 Explicit Costs:Rent $1500 Materials and Supplies 4200 Utilities 1000 Hired labour 10 000 Depreciation on equipment 500 Total Explicit Costs: 17 200 Accounting Profit: 2 800 Implicit Costs:Opportunity costs of $96 000 put into business 800 Labour put in by owners 4000 Total Implicit Costs: 4 800 Total Explicit and Implicit Costs: 22 000 Economic Profit or (Loss): (2 000)

4. Accounting v Economic Profit 6-4© 2012 McGraw-Hill Ryerson Limited LO1 Accounting profit  total revenue  total explicit costs Economic profit  total revenue  total costs (including implicit and explicit costs)

5. 6-5© 2012 McGraw-Hill Ryerson Limited LO1

6. Accounting v Economic Profit 6-6© 2012 McGraw-Hill Ryerson Limited LO1 Normal Profit the minimum profit that must be earned to keep the entrepreneur in that type of business Economic Profit revenue over and above all costs, including normal profits Sunk Cost the historical costs of an asset that are unrecoverable

7. Self-Test 6-7© 2012 McGraw-Hill Ryerson Limited Abdi recently gave up a job that paid $1500 a month to open up his own convenience store. He works full time in the store which had total revenue of $105 000 last year. His total (explicit) costs amounted to $65 000. He reckons his store is now worth $200 000 and if he were to sell it and invest the proceeds in his dad’s supermarket he would earn an 8 percent annually. What is Abdi’s economic profit during the year? LO1