01:220:102 Lecture 14: ECON 102 Lecture 14 - Decision Making by Individuals and Firms

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Published on 19 Oct 2018
ECON 102 Lecture 14 - Decision Making by Individuals and Firms
Explicit and Implicit Costs:
- Explicit cost is a cost that occurs, is easily identified, and is accounted for in
business documents or financial statements
-Implicit costs are the opportunity cost of resources already owned by the firm and
used in business
-An example of an implicit cost is expanding a factory onto land already owned.
Definitions of Profit:
- Accounting Profit is Total Revenue - Explicit Costs
- Economic Profit is Total Revenue - Opportunity Cost
- Opportunity Cost = Explicit Cost + Implicit Cost
- Economic profit determines if you are in the most optimal position
- If economic profit is above 0, you are in the best possible position
- If economic profit is less than 0, you can spend your time more efficiently by
switching to an alternative
- The total value of assets owned
- Physical assets + Financial assets
- Implicit cost of capital is the opportunity cost of using your capital
Decision Making:
- Either/or choices between two alternatives
- The choice should be the one with higher profits
- Making choices at the margin (How much of something?)
Marginal Analysis:
- Marginal cost: the additional cost incurred by producing one more unit of that
good or service.
- The marginal cost function is the derivative of the average cost function
- Marginal Cost = Change in total cost / Change in quantity
- Marginal Cost Curve - models how the cost of producing one more unit depends
on the quantity that has already been produced
- Marginal Cost Curve for every good is different
- Increasing marginal cost means that every single good costs more and more to
- Decreasing marginal cost mean each good costs lower and lower
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