Economics, 3rd Edition

explicit costs

 input costs that require an outlay of money by the firm

implicit costs

 input costs that do not require an outlay of money by the firm

PRODUCTION AND COSTS

Firms incur costs when they buy inputs to produce the goods and services that they plan to sell. In the 

analysis that follows, we make an important simplifying assumption: we assume that the size of Paolo’s 

factory is fixed so that Paolo can vary the quantity of pizzas produced only by changing the number of 

---

136  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

workers. This assumption is realistic in