Question

Write a short note on Economic cost.

Answer 1

Economic cost refers to the total cost of choosing one alternative over another. It includes both:

1. Explicit Costs: Actual monetary payments made by a firm (e.g., wages, rent, raw materials).
2. Implicit Costs: The opportunity costs of using self-owned resources (e.g., owner's time, capital).

Economic Cost = Explicit Cost + Implicit Cost

Economic cost gives a broader view of the real sacrifice involved in production and is important in decision-making and profit calculation. It helps in determining economic profit, which is:

Economic Profit = Total Revenue − Economic Cost

This concept is vital in understanding whether a firm is truly earning more than its next best alternative use of resources.