Supply And Production Costs: Explicit And Implicit Costs Of Production

Supply and Production Costs
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Explain the difference between explicit and implicit costs of production.
Economists consider the cost of production as the total of explicit and implicit costs. Explicit costs are the payments to the non-owners to run a company, and represent the business expenses that are easily identified as they are the cash flows that reduce the business profitability. On the contrary, the implicit costs represent the value of resources utilized in the production process where there are no monetary payments. They are implied costs that are the opportunity costs equated to what firms give up to utilize the factors of production (Lulu Press, 2016). For instance, a business owner who forgoes their salary even while running the business. There is an imputed value that the firm may use based on the best alternative use. Normal profits are another example of the implicit costs as they represent the minimum payments to keep the owner self-employed.
Explain the reasoning behind the U-shaped, long-run, average cost curve.
In the long run all the factors of production are variable and this affects the cost as the output variable. The long run costs first decrease when the output increase because of the economies of scale, and the costs increase at a decreasing rate the average cost of production falls. As such, in the long-run, the average cost curve is U-shaped since the costs first fall, due to the economies of scale, then there are constant economies of scale as represented by the constant long run average costs and then followed by the long run average costs rising resulting to the diseconomies of scale whe...