The Firm MCQ 2 (Costs and large firms)

Types of Costs

Explicit Costs

• Monetary costs of production that can be accounted for
• Examples: staff wages, cost of raw materials

Implicit Costs

• Non-monetary costs that are not accounted for in the same way as explicit costs
• Examples: opportunity costs

Private Costs

• Costs borne by the individual who engages in an activity
• Example: cost of doctor appointments for a smoker

Social Costs

• Total costs to society of an activity
• Include private costs and costs to others, such as cleaning up cigarettes

Implications of Large Firms

Advantages

• Large firms can invest in Research and Development (R&D), fostering creativity and innovation.
• Economies of Scale allow large firms to offer lower prices to customers.
• Job Security is often higher in large firms, providing employees with a sense of stability.

Disadvantages

• Moral Hazard arises when large firms are protected, reducing their incentive to guard against risk and potentially leading to less creativity.
• Large firms have the resources to merge with or takeover smaller firms, potentially stifling competition.
• They can influence Political Opinion, potentially shaping policies in their favor.
• Large firms may engage in Collusion, secretly cooperating with competitors to fix prices or restrict supply.
• Without competition, large firms may charge Very High Prices, taking advantage of their market dominance.

Identify the different types of costs in economics, including explicit, implicit, private, and social costs. Learn how these costs are accounted for and their impact on production and society.