The economy model of the firm, the input that is NOT explicitly included is:
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Answer: Private enterprise—the ownership of businesses by private individuals—is a hallmark of the US economy. When people think of businesses, often giants like Wal-Mart, Microsoft, or General Motors come to mind. But firms come in all sizes, as you can see in the table below.
The vast majority of US firms have fewer than 20 employees. As of 2010, the US Census Bureau counted 5.7 million firms with employees in the US economy. Slightly less than half of all the workers in private firms are at the 17,000 large firms, firms that employ more than 500 workers. Another 35% of workers in the US economy are at firms with fewer than 100 workers.
These small-scale businesses include everything from dentists and lawyers to businesses that mow lawns or clean houses. There are also millions of small, non-employer businesses where a single owner or a few partners are not officially paid wages or a salary but simply receive whatever they can earn—there is not a separate category in the table for these businesses. We can distinguish between two types of cost: explicit and implicit. Explicit costs are out-of-pocket costs—payments that are actually made. Wages that a firm pays its employees or rent that a firm pays for its office are explicit costs.
Implicit costs are more subtle but just as important. They represent the opportunity cost of using resources already owned by the firm. Often for small businesses, they are resources contributed by the owners—for example, working in the business while not getting a formal salary or using the ground floor of a home as a retail store. Implicit costs also allow for depreciation of goods, materials, and equipment that are necessary for a company to operate.
These two definitions of cost are important for distinguishing between two conceptions of profit—accounting profit and economic profit. Accounting profit is a cash concept. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. Economic profit is total revenue minus total cost, which includes both explicit and implicit costs.
The difference is important. Even though a business pays income taxes based on its accounting profit, whether or not it is economically successful depends on its economic profit.