Project on Micro Economy - Essay Example

Opportunity cost refers to the best alternative forgone when Supa drinks decides to produce Thasta over other product lines. When the concept of opportunity cost is discussed it is critical to put into perspective issues such as implicit and explicit cots. Implicit cost is when an alternative if forgone but there is no actual cost included. Therefore, implicit cost refers to financial benefits forgone when one makes one decision over the other. On the hand, explicit costs refer to cost that is easy to account for owing to the fact that their effects are easily traceable (Hirschey112.

They include cost such as wages, rent, material cost. In fact, in implicit costs, the management has to pay the money directly. By Supa Drinks deciding to start the production of Thasta, it is going to incur both implicit and explicit cost. The implicit cost incurred refers to the forgone profits that Supa Drink has not received because they opted to produce Thasta instead of the other alternative. Thasta was faced with several options, which include production of detergent, production of stationery, and production of electronics.

Out of all the production choices, the one that had the best alternative to Thasta was a production of detergents. The company had estimated that it would record on average net cash flow of $ 200, 000 per annum. By deciding to produce Thasta over the Detergent, it has undergone an implicit cost of $200, 000. On the other hand, explicit costs that are incurred by the company include labor costs, input cost and general expenses. Production of Thasta is a costly affair; there is therefore, huge initial capital outlay that is required to start the production of Thasta.

There is cost required to erect a plant for production of the drink, there is wages that will be incurred to pay workers, and general expenses such as electricity expenses among others. The explicit cost that will be incurred by the company is outlined below. Item no Expense item Cost per annum ($) 1. Labor cost 50000 2. Plant maintenance cost 40000 3. General cost 10000 4. Promotion costs 15000 5. Total cost 115000 It is worth noting that opportunity cost refers to both the implicit and explicit cost.

Therefore, by management deciding to produce Thsata over the best alternative of the production of detergent will result to an opportunity cost of $ 215000. This is calculated by summing up the total implicit cost, which is $ 200000, and the total explicit Cost, which is $115000. It is also recommended that the company operate at economic profits so that there is both allocative and productive efficiency in production. Allocative efficiency refers to a situation in which the net profit is zero.

This point of production would mean that the company is not under producing or overproducing the soft drink. Second Section: Trade Offs The company will produce two brands of Thasta, which is the orange flavored and the other is coke flavored. This means that the company must consider the issue of trade off when deciding the units of the orange flavor and coke flavor to produce. It is worth noting that the company has a production capacity of up to 50000 units’ daily production. This production capacity must be divided between the two brands.

This brings about the concept of trade off. As the company produces more and more of orange flavor, it will produce less of Coke flavor along the production possibility