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01:220:102 (14)
Chapter 9

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Department
Economics
Course
01:220:102
Professor
Thomas Prusa
Semester
Fall

Description
Chapter 9 – Making Decisions Opportunity Cost and Decisions  Resources are scares  True cost of anything is its opportunity cost- cost of something is what you must give up to get it Explicit vs. Implicit Costs  Explicit cost- cost that requires an outlay of money  Implicit cost- does not require an outlay of money; measured by the value, in dollar terms, of benefits that are forgone Accounting Profit vs. Economic Profit  Accounting profit- business’s revenue minus the explicit cost and depreciation  Economic profit- business’s revenue minus the opportunity cost of its resources; usually less than accounting profit  Depreciation- reduction in value  Capital- value of a business’s assets- equipment, buildings, tools, inventory, and financial assets  Implicit cost of capital- opportunity cost of the capital used by a business- income the owner could have realized from that capital if it had been used in its next best alternative way  Companies report their accounting profit, which is not necessarily equal to their economic profit  Due to the implicit cost of capital and the opportunity cost of the owner’s time, economic profit is often substantially less than accounting profit Making “How Much” Decisions: The Role of Marginal Analysis Marginal Cost  Marginal cost of producing a good or service is the additional cost incurred by producing one more unit of that good or service  Production of a good or service has constant marginal cost when each additional unit costs the same to produce as the previous one  Marginal cost curve shows how the cost of producing one more unit depends on the quantity that has already been produced o Horizontal marginal cost curve- constant marginal cost o Upward-sloping marginal cost curve- increasing marginal cost  Production of a good or service has increasing margi
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