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From Wikipedia, the free encyclopedia

Economic cost is the combination of losses of any goods that have a value attached to them by any one individual.[1][2] Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another. The factors to be taken into consideration are money, time, and other resources cost is the sum of explicit cost.[3]

The comparison includes the gains and losses precluded by taking a course of action as well as those of the course taken itself. Economic cost differs from accounting cost because it includes opportunity cost.[4][2][5] (Some sources refer to accounting cost as explicit cost and opportunity cost as implicit cost.[2][5])

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  • Episode 21: Accounting Costs vs. Economic Costs
  • Understanding Economic Cost - how economic cost is calculated
  • Calculating the global economic cost of climate change


Sometimes, people need to readjust their thinking as to what costs mean in economic analysis. From an accounting standpoint, costs refer to direct, or out-of-pocket, or explicit costs. What do I, the business owner, pay for the resources that I use to produce my product? Accounting costs are explicit costs. This means that, from an accounting standpoint, profit is total revenue minus explicit costs, where total revenue can be found by taking the number of units sold times the price charged for each unit. An economist, however, would tell you that you're omitting a critical component: what about the value of the resources you already own, that could be used elsewhere? For example, your own labor goes into your business, but you could sell their labor elsewhere, couldn’t you? We have a name for these implicit, or indirect, costs -- opportunity costs. Economic costs do, of course, include the explicit, or accounting costs, but also the implicit, or opportunity, cost. So economic costs are both the explicit and the implicit costs. From an economic standpoint, then, profit is going to be the total revenue minus the explicit costs, but then also subtracting the implicit costs. The question you might have is: does this distinction really matter? The answer is yes; failure to consider the implicit or opportunity costs could lead you to a faulty conclusion in considering choices. Consider this: a small farmer grows wheat. He manages to grow 20 bushels of wheat, which he can sell for $5 per bushel. This means, of course, that his total revenue is $5 times the 20 bushels, or $100. The farmer’s explicit costs of production are $40. Remember the explicit costs are the direct costs of purchasing resources. What might this $40 represent? Maybe seeds? Irrigation? Machinery? Or workers? What's the farmers accounting profit, then? Accounting profit is the total revenue minus the explicit cost. So in this case you have $60 of profit. Pretty good, right? The farmer is happy when his accountant tells him that he's earning $60 of profit. But then an economist that he knows tells him that he's forgotten something: what about his opportunity cost? Suppose that the farmer could be working in town at the local burger joint for $5 an hour. For every hour he spends farming, he sacrifices $5 salary elsewhere. So if, for example farming took 3 8-hour long days, for a total of 24 hours, his implicit cost would be $5 an hour, times the 24 hours it took him to grow the wheat, or $120. What's the farmer’s economic profit then? Economic profit was the total revenue minus both the explicit and the implicit costs. He’s actually losing $60. From the economic standpoint, the farmer is losing money and therefore, assuming as we are that all producers are interested in maximizing profits, he'd be better off working at the local burger joint. One last note: $0 economic profit is also known as a normal accounting profit. If you find that a business owner is making a zero economic profit, it doesn't mean that he or she earns nothing; it means that revenues are enough to cover all of your costs, even the value of the owner's time. NEXT TIME: Fixed versus variable costs. TRANSCRIPT (MICRO) EPISODE 21: ACCOUNTING VS. ECONOMIC COSTS

Aspects of economic costs

Shows a firm's Economic Costs in the "Short Run" - which, as defined, contains at least 1 "Fixed Cost" that cannot be changed or done away with even if the firm goes out of business (stops producing)
Shows a firm's Economic Costs in the "Short Run" - which, as defined, contains at least 1 "Fixed Cost" that cannot be changed or done away with even if the firm goes out of business (stops producing)
  • Variable cost: Variable costs are the costs paid to the variable input. Inputs include labor, capital, materials, power and land and buildings. Variable inputs are inputs whose use vary with output. Conventionally the variable input is assumed to be labor.[6]
  • Fixed cost (TFC) are the costs of the fixed assets those that do not vary with production.[7]
    • Total fixed cost (TFC)
  • Average cost (AC) are total costs divided by output. AC = TFC/q + TVC/q
    • Average fixed cost (AFC) is equal to total fixed cost divided by output i.e. AFC = TFC/q. The average fixed cost function continuously declines as production increases.[8]
    • Average variable cost (A.V.C) = variable costs divided by output. AVC =TVC/q. The average variable cost curve is typically U-shaped. It lies below the average cost curve and generally has the same shape - the vertical distance between the average cost curve and average variable cost curve equals average fixed costs. The curve normally starts to the right of the y axis because with zero production[8]
  • Marginal cost (MC): Marginal cost is obtained from the additional cost that results from increasing output by one unit. It is the additional cost per additional unit of output.[8]


  1. ^ Phillips, Ulrich B. (1905). "The Economic Cost of Slaveholding in the Cotton Belt". Political Science Quarterly. 20 (2): 257–275. doi:10.2307/2140400. hdl:2027/hvd.32044082042185. ISSN 0032-3195. JSTOR 2140400.
  2. ^ a b c "What is economic cost? Definition, comparisons, and examples". Market Business News. Retrieved 2019-07-16.
  3. ^ "economic cost". Cambridge Dictionary of Business English. Cambridge University Press. Retrieved 2019-07-16.
  4. ^ "Economic Cost: Definition, Function & Quiz". Retrieved 11 April 2015.
  5. ^ a b Leonard, Kimberlee (2019-01-31). "The DiffereBetween Accounting Costs & Economic Costs". Chron. Retrieved 2019-07-17.
  6. ^ a b "Variable Costing Formula (Examples) | How to Calculate Variable Costing?". 2019-01-10. Retrieved 2019-07-07.
  7. ^ "Costs of production: fixed and variable | Economics Online". Retrieved 2019-10-04.
  8. ^ a b c Be able to explain and calculate average and marginal cost to make production decisions.
  9. ^ Eiteman, Wilford J.; Guthrie, Glenn E. (1952). "The Shape of the Average Cost Curve". The American Economic Review. 42 (5): 832–838. ISSN 0002-8282. JSTOR 1812530.
  10. ^ Beggs, Jodi. "Cost Curves Associated With Costs of Production". ThoughtCo. Retrieved 2019-07-16.
This page was last edited on 17 October 2021, at 18:10
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