Individuals, institutions, and society make choices among scarce resources. Demand and needs from individuals, institutions and society far exceeds the resources available. In economics scarcity exists because resources are limited. Because resources are scarce we must decide what we want to consumer and what we want to give up.
In economics nothing is free. There is a cost to everything. The cost may be explicit or implicit. Explicit costs are those expenditures a firm makes to others that supply resources to the firm. Business accounting expenses of a firm are considered explicit costs. Depending on the type of business the business expenses might be expenditures for labor, materials, products, machinery, utilities, rent, etc. Implicit costs are intangible cost of the firm. Implicit costs are considered the opportunity costs a firm could make on its own resources. When a firm gives up something by using its own resources there are implicit cost. An example of implicit cost would be if someone chose to work on their home in stead of going to work. Let’s say someone worked on their home for 2 hours. If they went to work they would have earned $100 (2 hours X $50 an hour). The foregone wages of $100 would be the implicit cost. Let’s say the materials to work on their home cost $50. Explicit cost + implicit cost = total cost. Explicit cost = $50 in material, implicit cost = $100 of foregone wages. Total economic cost is $50 in material + $100 of forgone wages = $150 total cost. In economics nothing is free.
Costs are not always the monetary value given up to get something in exchange. If someone gave you a bottle of water for free, from your perspective it may seem free, since you did not give any monetary value for the bottle of water. To produce goods and services it takes natural, manufactured and human resources. When these scare resources are used to produce this bottle of water society has given up the opportunity to utilize these resources for the production of other goods and services. To economists this is called opportunity costs. The choices that are made are tradeoffs. In economics individuals, institutions, and society must make choices among these scarce competing resources.
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Source by Walter Eng