Implicit Cost Analysis
The study of the firm, or the producer, has many terms that are related but substantively different in meaning. The ideas of economic as opposed to accounting profit, implicit as opposed to explicit costs and economies or dis-economies of scale are all related but have important distinctions. I will attempt to address each of these conceptual relationships in the following paragraphs.
While profit may seem the first item for any business or firm, cost is actually counted first. As any type of profit has a component of cost, costs must be understood from the very beginning of the enterprise.
There are actually two differing type of cost from an economic understanding, explicit and implicit cost. Explicit cost can be counting usually, and is made up of all the dollars that must be spent to produce. Implicit is not as easily counted and is made up of all the possible profits that must be foregone to produce. Some examples of explicit cost would be material inputs to production such as plastics for injection molding production or energy costs such as fuel for a delivery service or electricity for a manufacturing plant. Some examples of implicit costs would …show more content…
Essentially, most production grows as first because as larger amounts are produced, the production become initially more efficient.
In the case of the law firm, for instance, each new partner brings in more connections and possible clients, and with a larger group, more of the less technical work can be shared by existing clerks and office workers. However, every production eventually reaches a level where more inputs begin created less output, and a law firm is no different. Eventually, the size of the firm makes management difficult, the paperwork maintenance reaches saturation with the present staff level, and as marginal costs begin to increase, revenues