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Unformatted text preview: 1 Econ 1, Winter 2008 RATIKA NARAG, Ph.D. LECTURE 12 Agenda for the This Week Chap 7, pages 160-172: 02/19 Chap 8: 02/19 and 02/21 Office hours on 02/21: 9:15 -11:15 am No office hours on 02/28 LECTURE 12 Main Ideas of Chap 7: How economists model decision making by consumer and firms Implicit vs. explicit costs Economic and accounting profit Marginal analysis Sunk costs and why we should ignore them LECTURE 12 All costs are OC: Can be explicit or implicit Total OC of a business is the sum of explicit costs and implicit costs Explicit Cost: Involves actually laying out money Implicit Cost: Does not require an outlay of money; is measured by the value, in dollar terms, of the benefits that are foregone LECTURE 12 Explicit Cost: E.g. wages, rent, utilities Implicit Cost: The OC of using resources owned by the firm; no actual payment is made to outsiders; OC of self-owned, self- employed resources in their next best alternative use LECTURE 12 Accounting Profit: reported by corporate firms; does not necessarily equal economic profit Accounting Profit = TR Explicit Costs and Depreciation Economic Profit = TR OC; is often < Accounting Profit Economists count all explicit and implicit costs prior to reporting a residual or pure economic profit 2 LECTURE 12 How Much Decisions: Role of Marginal Analysis Comparing the benefit of doing a little more of an activity (MB) with the cost of doing a little more of that activity (MC) MC: Additional cost incurred by doing one more unit of an activity MB: Additional benefit derived by undertaking one more unit of an activity LECTURE 12 MC Curve: Shows how the cost of undertaking one more unit of an activity depends on the quantity of that activity that has already been done Upward sloping MC curve reflects increasing MC MB Curve: Shows how the benefit from undertaking one more unit of an activity depends on the quantity of that activity that has already been done Downward sloping MB curve reflects decreasing MB LECTURE 12 Marginal Analysis Optimal quantity of an activity is the level that generates the maximum possible total net gain Principle of Marginal Analysis: Optimal quantity is the quantity at which MB = MC; intersection of the MC and MC curves LECTURE 12 It is rational to do something until its marginal benefit equals its marginal cost The marginal benefit of doing something is the...
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- Winter '08