Monday, May 23, 2022

IB Economics | Economic Cost | Explicit vs Implicit Cost

In this video I'd like to introduce the concept of economic cost I already wrote here everything that's necessary for me to go through the content that I'd like to talk about so I will just describe a bit in more detail what I've written so far as you can see I wrote here two types of costs explicit and implicit costs now what is the difference between .

Them and why do we have to keep it in mind the reason being is that in economics we learn to think from a big picture standpoint we learn to consider the opportunity cost of every decision the opportunity cost is going to be the next best alternative when we make a decision so in order for us to make better decisions we want to consider .

What we're giving up we want to consider how much resources were giving up we want to consider how much money could we make in our next best alternative so what are going to be our explicit costs these are going to be the direct payments that we make as a firm for instance when we pay for our employees a wage of an employee is going to be an .

Explicit cost we pay for it however an implicit cost is going to be the opportunity cost of the resources owned by the firm that could have been used elsewhere for instance as an entrepreneur who owns the firm the entrepreneur could have an alternative job instead of starting that firm so therefore the entrepreneur is giving .

Up a wage and income from a job in in exchange for running a business so therefore the opportunity cost for the entrepreneur is the labor that he could have provided to another company therefore when we are considering the both types of costs as a firm we must consider how much payments do actually have to make for our labor for our .

Capital for our land and on top of that how many resources are we giving up by doing what we are currently doing how many resources that we own at the moment could be used somewhere else another example could be for instance if we as a firm have a building and we want to use it in order to produce our products well the implicit cost of having .

Building would be the opportunity cost of owning the building and that building could be rented out and generate income so therefore the implicit cost is the income that we're giving up from the rent of the building in exchange for using it as a production facility hope this makes sense now this is the introduction to the concept of economic .

Cost in the next video I want to talk about the difference between accounting profit and economic profit such that you will see better how these costs are relevant for that discussion anyway hope this all makes sense I appreciate your watching if you like the video please make sure to subscribe and we are done .

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