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Firms, Opportunity Costs, and Profits Review for AP Economics (page 2)

By — McGraw-Hill Professional
Updated on Mar 4, 2011

So Which Should I Use?

Excellent question. The "quickie" answer is to turn to the title page of this book, and use that method. Of course, as a student of economics, you must include implicit economic costs in calculating economic profit. But why? Well, it's more accurate. An adept student of economics knows that the cost of something goes beyond the price tag. A friend of mine in graduate school once said that "nothing is free, it is just non-priced." If you visit your AP teacher's office, you might not have to pay to pass through the door, but you could be doing something else with your time. This is a non-priced economic cost. Molly's labor and effort at the lemonade stand appear to be free; this is why an accountant does not include that effort in calculating profit. An economist knows that it is not free—it is just non-priced. An economist tries to quantify that price by using the value of Molly's efforts in her next best alternative as the banker. Throughout this book, costs refer to economic costs, and profits refer to economic profits.

Short-Run and Long-Run Decisions

The short run is a time when at least one production input is fixed, and cannot be changed, to respond to a change in product demand. During the holiday season a local gift shop extends hours and increases the workers hired. Much more difficult to change is the total capacity of the shop. The capacity of the shop is fixed in the short run, but can be altered with enough time. The amount of time required to change the plant size is known as the long run. In other words, all inputs are variable in the long run. See Table 8.1.

Example:

When Molly pays $25 for a monthly vendor's license on January 1st, she is committed for a month. She cannot receive a refund if she fails to operate the lemonade stand and she does not have to pay more if she works 24 hours a day all month. For Molly, the long run is one month. On the other hand, at any point in the month, Molly can choose to purchase more lemons, cups or sugar, or employ assistants, if she is selling more cups of lemonade. This is a short-run decision.

Review questions for this study guide can be found at:

The Firm, Profit, and the Costs of Production Review Questions for AP Economics

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