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In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly. [1]
The latter view is the consensus of later classical economists, with the Ricardo-Malthus-West theory of rent.) David Ricardo mixed this cost-of-production theory of prices with the labor theory of value, as that latter theory was understood by Eugen von Böhm-Bawerk and others. This is the theory that prices tend toward proportionality to the ...
In economics, the theory of imputation, first expounded by Carl Menger, maintains that factor prices are determined by output prices [6] (i.e. the value of factors of production is the individual contribution of each in the final product, but its value is the value of the last contributed to the final product (the marginal utility before reaching the point Pareto optimal).
It is different from accounting profit, which only relates to the explicit costs that appear on a firm's financial statements. An accountant measures the firm's accounting profit as the firm's total revenue minus only the firm's explicit costs. An economist includes all costs, both explicit and implicit costs, when analyzing a firm. Therefore ...
In other words, returns to scale analysis is a long-term theory because a company can only change the scale of production in the long run by changing factors of production, such as building new facilities, investing in new machinery, or improving technology. There are three possible types of returns to scale:
The more variable costs used to increase production (and hence more total costs since TC=FC+VC), the more output generated. Marginal costs are the cost of producing one more unit of output. It is an increasing function due to the law of diminishing returns , which explains that is it more costly (in terms of labour and equipment) to produce ...
The theory entails that there is a limit to how much one factor can be substituted for another. When production reaches a point where substitution between the factors becomes impossible (MP LK), the isoquant becomes positively sloping. No rational entrepreneur will operate at a point outside the ridge lines (Region of Economic Nonsense).
Shephard's lemma is a major result in microeconomics having applications in the theory of the firm and in consumer choice. [1] The lemma states that if indifference curves of the expenditure or cost function are convex, then the cost minimizing point of a given good with price is unique.