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DISEQUILIBRIUM, AGGREGATE MARKET: The state of the aggregate market in which real aggregate expenditures are NOT equal to real production, which result in imbalances that induce changes in the price level, aggregate expenditures, and/or real production. In other words, the opposing forces of aggregate demand (the buyers) and aggregate supply (the sellers) are out of balance. Either the four macroeconomic sector (households, business, government, and foreign) buyers are unable to purchase all of the real production that they seek at the existing price level or business-sector producers are unable to sell all of the real production that they have available at the existing price level.
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                           ECONOMIC COST: An alternative term for opportunity cost, which is the highest valued alternative foregone in the pursuit of an activity. Opportunity cost, or economic cost, is one of the most fundamental concepts used in the study of economics, hence the reason it is also termed economic cost. Economic, or opportunity cost is also commonly termed just cost. The term economic cost is often used synonymously with opportunity cost. Replacing "opportunity" with "economic" serves to punctuate the central role opportunity cost plays in economics. It also distinguishes "cost" as used in economics, with "cost" as used in other disciplines, like accounting.Starting With ScarcityThe ultimate source of economic cost is the pervasive problem of scarcity (unlimited wants and needs, but limited resources). Whenever limited resources are used to satisfy one want or need, an unlimited number of other wants and needs remain unsatisfied. Hence pursuing one activity means alternatives are not pursued. Herein lies the essence of economic cost. Doing one thing prevents doing another.Because economist like to economize on effort, the succinct term cost is also frequently used in lieu of opportunity cost or economic cost. In fact, whenever the term cost is used in economics, absent of any modifiers, it inevitably means economic or opportunity cost. Accounting CostThe primary contrast to economic cost is accounting cost. An accounting cost is an actual outlay or expense incurred in production that shows up in a firm's accounting statement or other records. However, every accounting cost tracked by a firm is not necessarily an economic or opportunity cost. Moreover, every economic cost incurred by a firm does not necessarily show up as an accounting cost.Consider a few examples. - Accounting Cost, Not Economic Cost: In some cases, an accounting cost recorded by a firm does not reflect an economic or opportunity cost. In other words, there is no foregone satisfaction. The recorded item, more often than not, is actually economic profit, revenue that is earned in excess of economic cost.
An example is provided by Winston Smythe Kennsington III, the Chief Executive Officer of OmniConglomerate, Inc. Winston receives an annual "salary" of $10 million. This $10 million salary is recorded as an accounting cost by the firm. While he is an excellent leader, this salary exceeds his opportunity cost. If he were not head of OmniConglomerate, his next best alternative is to assume CEO status of MegaCorp International at a $5 million annual salary. As such, only half of Winston's $10 million salary is an economic cost, the other half is actually economic profit.
- Economic Cost, Not Accounting Cost: In some cases an economic cost incurred by a firm is not recorded as an accounting cost. In other words, there is foregone satisfaction, but this economic cost never makes it to the firm's records. For many firms, this untracked cost falls under the heading of normal profit, the opportunity cost of entrepreneurship. However, the cost of other resources can also go unrecorded.
Consider the situation facing Manny Mustard's House of Sandwich. Manny Mustard, the owner and proprietor of this restaurant, supplies his own time, effort, equipment, and organizational skills to the successful operation of this business. When the day is done, Manny subtracts his out-of-pocket expenses (for condiments, electricity, hired staff, and the like) from the revenue received. This is his income, which he probably considers the firm's profit. However, included within this "profit" is unrecorded economic cost for his labor, capital, land, and entrepreneurship.
Recommended Citation:ECONOMIC COST, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: July 26, 2024].
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Today, you are likely to spend a great deal of time at the confiscated property police auction hoping to buy either a travel case for you toothbrush or a looseleaf notebook binder. Be on the lookout for jovial bank tellers.
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Only 1% of the U.S. population paid income taxes when the income tax was established in 1914.
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"Old age isn't so bad when you consider the alternative. " -- Cato, Roman orator
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OAS
Organization of American States
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