Background to Supply

Question 1

Compare explicit and implicit costs

Answer 1

Explicit Costs: Payments to outside suppliers of inputs.

Implicit Costs: Costs that do not involve a direct payment of money to a third party, but which nevertheless involves a sacrifice of some alternative.

Question 2

Compare the short run and the long run

Answer 2

Short Run
- Some inputs are fixed (e.g., factories, land)
– The costs of these inputs are FC

Long Run
– All inputs are variable (e.g., firms can build more factories or sell existing ones)

Question 3

compare economic and accounting profit

Answer 3

Economic Profit
Total revenue minus total costs including implicit costs.

Accounting Profit
Total revenue minus explicit costs.

Question 4

what is the Cobb Douglas production function

Answer 4

particular functional form of the production function, widely used to represent the technological relationship between the amounts of two or more inputs and the amount of output that can be produced by those inputs