Question

give a brief explanation of at least one of the concepts listed below, including an example to support your presentation.

• Fixed costs versus variable costs
• Explicit costs versus implicit costs
• Accounting profits versus economic profits
• Marginal cost and marginal revenue
• Production maximization output
• Optimum level of output
• Monopolistic competition
• Perfect competition
• Law of dimensioning return to labor

Answer 1

Fixed costs versus variable cost

Fixed cost does not change with the level of output, whereas variable cost changes with the level of output. Further, fixed cost takes place even before the production takes place, but the variable cost takes place while the production goes on. For example, fixed cost are rent of the building, cost of machinery and salary of the top management. Variable cost examples are the material costs, wages paid to the workers.

Explicit costs versus implicit costs

Explicit costs are the actual costs that incur, whereas implicit cost are the opportunity cost. Explicit costs are considered as accounting costs, but implicit costs are the losses taken up due to the new opportunity being pursued. Examples of explicit cost, is the rent, wages paid and labor cost. Examples of implicit costs are salaries foregone for the new venture and interest earning foregone when funds are invested in business.

Accounting profit versus economic profit

Accounting profit is the profit that considers only explicit cost, but economic profit considers implicit cost, along with the explicit cost. For example, rent & wages will be considered in accounting profit, but salary foregone due to business venture is also considered in economic profit.