Question

I am interested in your comments regarding the economist concept of a normal rate of return as a cost of doing business.

Answer 1

Economists identify different types of revenues and costs and analyze how companies operate and how well they perform. When assessing a given business' economic profit, an economist must consider not only explicit costs but also implicit costs including the regular benefit needed to maintain business as usual.

In economics, something that the decision prohibits you from doing is a "opportunity cost" of a business decision. Imagine, for example, that you can either buy a big, wall-to-wall TV or take your family on a three-week holiday to Hawaii. You can buy the television but it will cost you the chance to go on holiday. If instead you take the holiday, the cost of taking a holiday is that you will not be able to buy a giant TV. Businesses face similar choices when it comes to choosing how to use their scarce resources.

Costs of opportunity can be either overt or implied. Explicit costs involve money expended on one resource, and therefore can not be spent on another resource. You can't take your family on holiday, for example, because you don't have the money; you've spent everything on a big screen TV. Implicit costs, however, are costs of opportunity not requiring spending money. You can't drive your car to the airport for a weekend, for example, because you are using it to go to the store and buy a TV. The implied cost of a farmer's decision to grow potatoes is that there is nothing else he can use the fields to grow.

Standard profit defines the unpaid value of the time of a business owner, or the minimum amount of income that could support the business owner in its present production model. For example, a farmer works in the fields for over 40 hours a week, and manages farm operations. He doesn't give himself a wage because he owns the company; rather he takes the money that he could gain and reinvests it into the business. Since he could use his time and energy to earn a salary at another job, this usual income represents an opportunity cost to own his farm.Because it doesn't involve actual money spending, usual income is known as an implicit business expense.