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Explicit Costs And Implicit Costs Concepts

1552 words - 7 pages

Q1: explicit costs and implicit costs concepts

Explicit Cost

Explicit cost is defined as the direct payment which is supposed to be made to others while running business. This includes the wages, rents or materials which are due in the contract.
The explicit cost is the expense done in business which can easily be identified and accounted for in the business at any stage. The explicit cost represents the out flows of cash in clear and obvious terms. When any out flow of credit occurs in a business, it should be identified and should be accounted for immediately.

Explicit cost is defined as the business expanse which is recorded with the passage of time. When cash starts out flowing from ...view middle of the document...

They do this by using the sum of the explicit and implicit costs to compute the total costs incurred by a business.

Q2: perfectly competitive firm

As identifying a perfectly competitive market as one in which no single firm has to influence either the equilibrium price of the market or the total quantity supplied in the market. Thus, a firm operating in a competitive market has no incentive to supply at a price lower than market equilibrium price, as it can sell all it wants to supply at equilibrium. At the same time, the firm cannot sell at price higher than the market price, because it will not be able to find buyers at that price. Because of the limited scope of economies of scale available to the firm, it is called a price taker. If a firm was able to increase its production to a very high level without reaching the bottom of its marginal cost curve, it will be able to affect market price and quantity in spite of identical product, changing the market structure to monopoly, and therefore will become a price maker instead of a price taker.

Q3: competitive firm’s production decision

Business decisions may be influenced by many different kinds of considerations. But the basic economic theory of business behavior is that firm exists to earn profits and that the goal of their managers will be to maximize those profits (or minimize their losses)... period.

The profit-maximizing (or loss-minimizing) rule for a firm is simple and intuitively appealing. Output should be set at the level where the difference between total revenue (quantity produced times the price per unit) and the total cost of producing that output is the greatest.

The same idea may be expressed using marginal rather than total values: the firm should produce that level of output at which its marginal revenue is equal to its marginal cost. In other word, deciding whether to increase output by one more unit or not, the firm should produce that additional unit if, by doing so, it can increase its revenues by more than its costs. If it would cost more to produce an additional unit than that unit can be sold for, it would be a mistake to produce it.

A competitive firm produces less than the total amount of this product supplied to the market that its output decisions have no impact on the market. Because of this, firms operating under such circumstances which called perfect competition have no influence over the price of their product. They are called "price takers" because the price established in the market as a whole is the price they will get for their output. This means that the firm’s marginal revenue is constant over the whole range of its possible and that consequently, marginal revenue, average revenue and price are all the same amount. This assumption that price does not change with output is characteristic of a truly competitive firm.

If the firm gets the same price for each unit it produces, the increase in its revenues resulting from producing an additional unit of...

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