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econ ch 7 outline

econ ch 7 outline - Kristin Chen Econ CH 7-Making Decisions...

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Kristin Chen Econ CH 7—Making Decisions 1. Opportunity Cost & Decisions a. Explicit Cost vs. Implicit Cost i. Explicit cost = cost that involves laying out the money ii. Implicit cost = doesn’t require outlay of money, measured by the value in dollar terms of the benefits that are forgone iii. Total opportunity cost = total explicit cost + total implicit cost b. Accounting profit vs. Economic Profit i. Accounting profit = revenue – (explicit cost & depreciation) ii. Economic profit = revenue – opportunity cost of resources 1. Usually less than accounting profit [due to the implicit cost of capital, the opportunity cost of a company’s capital, & the opportunity cost of an owners time] iii. Businesses face implicit costs for 2 reasons 1. Capital (equipment, buildings, tools, inventory, & financial assets) could have been put to use another way 2. Owner devotes time & energy to the business that could have been used elsewhere 3. Implicit cost of capital = the opportunity cost of capital used by a business; the income the owner could have realized from that capital if it had been used in its next best alternative way 2.
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