Question

1. Briefly define the following terms:

a. Explicit costs

b. Implicit costs

c. Normal profit

d. Accounting profit

e. Total product, average product, and marginal product

Answer 1

1a. Explicit Costs- The costs where the payments are made directly for tangible assets or work and are clearly defined are called as explicit costs. These costs are paid directly. Examples of explicit costs include rents, salaries, raw material costs,wages etc.

1b)Implicit Costs- Implicit costs are those costs where cash is not paid immediately and no outflow of case takes place. Implicit costs are costs which a firm gives up when it uses a productive asset which it uses instead of renting or selling the asset. Implicit costs are opportunity costs given up by using the productive asset. They are trade-off costs. for eg: the decision to invest in the part stock of a company instead of acquiring the entire company. The giving up of earnings from the entire company is the implicit costs. If a business buys a car and does not rent it out and uses it for its employee, the earnings forgone from renting the car is implicit costs.

1c)Normal Costs- Normal costs are the costs occurring during the normal course of the business. For eg: labour costs, material costs, overheads etc are an example of normal costs.These costs occur during the daily operations of a company.

1d)Accounting profit- Accounting profit is the income left behind after deducting all expenses from the revenue obtained. Accounting costs considers explicit costs and implicit costs are not considered.

1e)Total product- Total product is the amount of products obtained from fixed inputs factors and variable factors. The amount of product changes with changes in variable factors such as materials or labor.

Average product - Average product is the total amount of products produced divided by the amount of factors used.

Marginal Product- Marginal product is the increase in the total amount of product when a single unit of a factor is increased. It measures the change in output due to a unit increase in inputs.