02.13.14 Chapter 9 Utility and Consumer Choice PG. 243-258
All economic decisions involve the allocation of scarce resources. Some decisions are
“either-or” decisions, in which the question is whether or not to do something. Other
decisions are “how much” decisions, in which the question is how much of a resource to
put into a given activity.
The cost of using a resource for a particular activity is the opportunity cost of that
resource. Some opportunity costs are explicit costs; they involve a direct outlay of
Explicit cost: cost that requires an outlay of money
Implicit cost: a cost that does not require the outlay of money; it is measured by the
value, in dollar terms, of forgone benefits.
Other opportunity costs, however, are implicit costs; they involve no outlay of money
but are measured by the dollar value of the benefits that are forgone. Both explicit and
implicit costs should be taken into account in making decisions.
Capital: the total value of assests owned by an individual or firm—physical assets plus
Economic profit: revenue minus the opportunity cost of resources used; usually less
than the accounting profit.
Implicit cost of capital: the opportunity cost of the use of one’s own capital—the income
earned if the capital had been employed in its next best alternative use
Accounting profit: revenue minus explicit cost.
Many decisions involve the use of capital and time, for both individuals and firms. So
they should base decisions on economic profit, which takes into account implicit costs
such as the opportunity cost of time and the implicit cost of capital. Making decisions
based on accounting profit can be misleading. It is often considerably larger than the
economic profit because it includes only explicit costs and not implicit costs.
3. According to the principle of “either-or” decision making, when faced with an
“either-or” choice between two activities, one should choose the activity with the positive
economic profit. 02.13.14 Chapter 9 Utility and Consumer Choice PG. 243-258
4. A “how much” decision is made using marginal analysis, which involves comparing
the benefit to the cost of doing an additional unit of an activity. The marginal cost of
producing a good or service is the additional cost incurred by producing one more unit
of that good or service. The marginal benefit of producing a good or service is the
additional benefit earned by producing one more unit. The marginal cost curve is the
graphical illustration of marginal cost, and themarginal benefit curve is the graphical
illustration of marginal benefit.
Marginal cost: the additional cost incurred by producing one more unit of a good or
Marginal cost curve:a graphical representation showing how the cost of producing one
more unit depends on the quantity that has already been produced.
marginal benefit curve: a graphical representation showing how the benefit from
producing one more unit depends on the quantity that has already been produced. 02.13.14 Chapter 9 Utility and Consumer Choice PG. 243-258
5. In the case of constant marginal cost, each additional unit costs the same amount
to produce as the previous unit. However, marginal cost and marginal benefit typically
depend on how much of the activity has already been done. With increasing marginal
cost, each unit costs more to produce than the previous unit and i