Topic 2 - Costs

Question 1

Explicit costs

Answer 1

The payments made by firms to outside suppliers of inputs.

Question 2

The opportunity cost of implicit costs are equal to

Answer 2

what the factors could earn for the firm in some alternative use.

Question 3

A number of costs are not implicit and do not constitute current opportunity cost:

Answer 3

– Historic costs – the amount which the firm original paid for factors which they now own.
– Sunk costs – costs that cannot be recouped by transferring the asset to other users.
– Replacement costs – what the firm would have to pay to replace the factors it currently owns.

Question 4

Economies of scale:

Answer 4

Increasing the scale of production leads to a lower cost per unit.

Question 5

Accounting Profit

Answer 5

= Total Revenue – Explicit Costs

• The actual profit earned by the company during a particular financial year .

Question 6

Economic Profit

Answer 6

the remaining surplus left after deducting total costs from total revenue.