Question

Full paragraph

(a) Why do economists look at implicit costs? (b) Look at two businesses (one big and one small) and for each identify what might be their implicit costs. Be specific!

1.What is the marginal product of labor (MP or MPP)? Why is the curve shaped the way it is?

2.Explain and describe each of the four production relationships.

Answer 1

A . Economists are more interested in economic profit because it includes implicit costs. Economists measure economic profit as revenues less the sum of explicit and implicit costs..

In small business owner who chooses to work for his company without drawing a salary is forgoing the opportunity to earn a fair wage for his business skills and talents. The business owner's salary is an implicit cost.

In case of big companies when a company hires a new employee, for example, there are implicit costs to train that employee. If a manager allocates eight hours of an existing employee's day to teach this new team member, the implicit costs would be the existing employee's hourly wage, multiplied by eight. This is because the hours could have been allocated toward the employee's current role.

1. The marginal product of labor is the change in output (Y) per unit change in labor (L).

MPL(marginal product of labor)curve first increases, then decreases and eventually becomes negative.The falling MP_L is due to the law of diminishing marginal returns. The law states, "as units of one input are added (with all other inputs held constant) a point will be reached where the resulting additions to output will begin to decrease; that is marginal product will decline." The law of diminishing marginal returns applies regardless of whether the production function exhibits increasing, decreasing or constant returns to scale. The key factor is that the variable input is being changed while all other factors of production are being held constant. Under such circumstances diminishing marginal returns are inevitable at some level of production.

Diminishing marginal returns differs from diminishing returns. Diminishing marginal returns means that the marginal product of the variable input is falling. Diminishing returns occur when the marginal product of the variable input is negative. That is when a unit increase in the variable input causes total product to fall. At the point that diminishing returns begin the MP_L is zero.

2. The foundation of an economy is built on the four factors of production: land, labor, capital and entrepreneurship.

Land

Land implies all types of natural resources used to create goods and services. In addition to land, it includes commodities such as gold, timber, oil, copper and water. Resources can also be renewable, such as forests, animals and food.

Henry's toothbrush uses a natural resource – sap from the baobab tree. His plastic toothbrushes are made from another natural resource, petroleum.

Labor

Labor is the work performed by employees. The value of their work depends on their education, skills and desire to do a good job. One of the goals of an owner is to train employees to become more skilled to increase their productivity. The output of labor can be both physical and mental.

Labor is a flexible resource. Workers can be allocated to different sectors of the economy for the most productive output.

Capital

Capital includes the buildings, tools and machines that employees use to make goods and services. Some examples are forklift trucks, automated machines, hammers, computers and delivery vans.

Unlike land or labor, capital must be created by humans and designed for use by humans. In this sense, capital goods become the foundations for buildings, equipment, machinery and processes

Entrepreneurship

Entrepreneurship is the driving force behind the creation of a business. An entrepreneur finds ways to combine the other factors of production – land, labor and capital – to produce a product and make a profit. The most successful ones are the innovators who create new products to bring to consumers. Henry is an innovator who is bringing a new product to market.