1. eStudy.us Copyright eStudy.us 2009 michael.roberson@eStudy.us Explicit and Implicit Cost Shoe Co. Revenue$300,000 Cost $250,000 Profit $50,000 Explicit Cost – Payment to non owners for resources Accounting Profit or Loss Teacher $30,000Implicit Cost – Opportunity cost Economic Profit or Loss $20,000 Principal $50,000 $0 Super $100,000 - $50,000

2. eStudy.us The MarketSuperintendentPrincipalTeacher Suppose the only difference in all the above cost curves is the implicit cost in production. All three producers are equal in production efficiencies and acquire resource inputs at the same price. Which chart illustrates the superintendent? Which chart illustrates the principal? Which chart illustrates the teacher? ABC C B A The superintendent should exit the industry and return to education (higher opportunity cost) Now suppose the only difference in all the above cost curves is the explicit cost in production. All three producers are teachers but are unequal in production efficiencies or acquire resource inputs at different prices. “C” exits as the result of being less efficient relative to other competitors in the industry Copyright eStudy.us 2009 michael.roberson@eStudy.us Long Run Conditions – Perfect Competition Teacher

3. eStudy.us Average FirmThe Market S0S0 S1S1 Normal Profit – The minimum profit necessary to keep a firm in operation Long Run Economic Profit – When firms make more than a normal profit, firms enter the industry, as supply increases, a downward pressure is put on prices Long Run Economic Loss – When firms make less than a normal profit, firms leave the industry, as supply decreases, an upward pressure is put on prices Long Run Equilibrium – At the market price that enables firms to make a normal profit Long Run Perfectly Competitive Equilibrium – (P = MR = SRMC = SRATC = LRAC) D0D0 D1D1 D2D2 P0P0 P2P2 P1P1 MCLRAC Q $ D0D0 S2S2 Q P Copyright eStudy.us 2009 michael.roberson@eStudy.us Long Run Conditions – Perfect Competition (Economic Profit) (Economic Loss) (Normal Profit) S1S1 D1D1 P1P1 S0S0 D0D0 P0P0 (Economic Profit)