A large modern corporation

All labor costs will be expressed in money terms (though benefits and bonuses have to be included), since the shareholders don't supply labor to the corporation. It will pay interest to bondholders and dividends to shareholders. But the dividends aren't really a cost item – they include profits distributed to the shareholders. Thus we would say that the corporation has a net equity value, that is, that the corporation "owns" a certain amount of capital that it invests in its own business (very much like the absentee owner in the first example). This capital has an opportunity cost, and that opportunity cost is an implicit cost. The stockholders, who own the corporation, ultimately receive (as dividends or appreciation) both the opportunity cost of the equity capital and any profit left over after it is taken out.

In economics, all costs are included – whether or not they correspond to money payments. And when we say that businesses maximize profit, it is important to include all costs – whether they are expressed in money terms or not. It is an economics approach to costs. As an economists we included both the implicit costs and money costs in the cost analysis we will make. And economist has Economic profit concept, which means

Accounting profit - implicit costs = economic profit

42.Fixed and variable costs

The most common approach to costs in the short and long run might be as follows: in the short run, we have three major categories of costs:

Variable costs (VC) are costs that can be varied flexibly as conditions change. Usually the labor costs are the variable costs.

Fixed costs (FC) are the costs that stays the same. And the question is: how long is that span of time? And the question is we can’t say because it differs sufficiently for different firms. Suppose that firm employs ten carpenters for its carpentry workshop and they sign contracts for a year. At the same time they do not have its own equipment and should rent it from the other firm. In this case half a year – is a short run, while two year – long run.

So, the main difference between the long and short run is that in the long run all costs are variable.Here is a picture of the fixed costs, variable costs and the total of both kinds of costs:

Notice that the variable and total cost curves are parallel, since the distance between them is a constant number – the fixed cost.

Date: 2016-03-03; view: 926