Question

what are the implicit and explicit cost associated with introducing a new product ? what is the total cost associated with this venture and what happens to this cost in short and long run production?

Answer 1

Explicit costs

1. Costs related to salaries of employees working on this new product (Research and development)

2. Costs related to raw material required for the production.

3. Costs related to other operating expenses (Rent, selling, general and administrative)

4. Interest costs if debt financing is used.

5. Costs related to taxes associated with the profits

Implicit costs

1. Opportunity cost of labor, capital (resources)

2. Decrease in sales of other product due to introduction of this new product.

Total Cost = Fixed Cost + Variable Cost

Variable costs increase with increase in production, while fixed cost remains fixed.

For example rental expense will be fixed and will not depend on the production.

In short run the prodcution is less, so the cost per product is very high. Fixed cost will be high as compared to production. Variable cost will be less as the production is less.

In long run when production increases, the cost per product will reduce. Fixed cost will be low as compared to production. Variable cost will be high as the production is higher.