Sample Economics Essays on Implicit & Explicit Costs

The American Woolen Company is a successful firm in the US textile industry whose costs play an integral role in determining its profitability. Its strategy to maximize profits often includes reducing costs. Costs occur in four forms: implicit, explicit, variable, and fixed costs. To effectively reduce costs it is paramount for the firm to know and identify them since they vary depending on the industry. This essay seeks to outline the various types of costs, provide examples, and explain their effect on the economic viability of the American Woolen Company.

To begin with, implicit costs, also known as implied costs or imputed costs, are opportunity costs that a firm must incur in order to use a production factor under its ownership that could have been used for another purpose. The American Woolen Company’s implicit costs include depreciation of machinery involved in a capital projects and interest. Secondly, explicit costs are costs incurred when paying factors of production such as payment for rent, wages and salaries and raw materials. Explicit costs can be further broken down into fixed costs and variable costs. Firstly, fixed costs refer to costs that remain constant over time. They do not increase or decrease with regard to volume of production. The American Woolen Company’s fixed costs include rent payment, advertising, insurance and depreciation. Variable costs, on the other hand, are costs that vary depending on the firm’s volume of production. They increase with increase in production volume and decrease with decrease in production volume. The American Woolen Company’s variable costs include payments for raw materials and labour used in production.

The US textile industry is economically viable since clothing is a primary human need regardless of culture, race, and income level. The American Woolen Company, likewise, is economically viable due to the rising US population and entry into new markets in Asia (Moran, 2019). The firm is also profitable since its sales exceed its costs. The recent policies under the Trump administration such as tackling China for its alleged intellectual property violations have strengthened firms such as The American Woolen Company that were facing stiff competition from Chinese subpar, cheap products.

The effects of rising costs on firms in the textile industry is well explained by Goyal in his article ‘A Stitch in Time: Policy Flip-Flops have seen India lose in garments’ that appeared in the Economic Times. The article clearly explains that the garments production industry in India is facing difficult times and is on the verge of collapse despite having great potential to offer jobs and increase the country’s Gross Domestic Product if properly managed. Per Goyal (2020), the garments sector should be made a priority sector if it is to flourish. The government should pay close attention to it as well and play the role of searching for new markets overseas.

The article identifies certain costs though not directly. The implicit costs implied include depreciation while explicit costs includes salaries and wages to employees. A fixed cost mentioned in the article is cost of land for the factory and manufacturing premises. An example of a variable cost in the article is payment for labour used in production and costs incurred to obtain raw materials. Per the article, the textile industry in India is not economically viable and on the verge of collapse. The government owes the industry a huge amount of unpaid refunds which is causing a ripple effect on the industry’s ability to pay wages, salaries, and other necessitates producers require to access loans. The Indian textile industry is currently in a crisis and if the situation persists then layoffs should be expected followed by a total collapse in the garments production sector.

 

Reference

Goyal, M. (2020, January 12). A stitch in time: Policy flip-flops have seen India lose in garments exports but, it might not be too late. Retrieved from https://economictimes.indiatimes.com/industry/cons-products/garments-/-textiles/a-stitch-in-time-policy-flip-flops-have-seen-india-lose-in-garments-exports-but-it-might-not-be-too-late/articleshow/73207447.cms

Moran, M. (2019, May 15). 2019 State of the U.S. Textile Industry. Retrieved from https://www.textileworld.com/textile-world/features/2019/05/2019-state-of-the-u-s-textile-industry/