Notes on chapter 7 - to anyone thinking of investing in her...

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Notes on chapter 7 An explicit cost is a cost that requires an outlay of money. For example, the explicit cost of the additional year of schooling includes tuition. An implicit cost, on the other hand, does not involve an outlay of money; instead, it is measured by the value, in dollar terms, of all the benefits that are forgone. For example, the implicit cost of the year spent in school includes the income you would have earned if you had taken that job instead. Basically, the accounting profit of a company is its revenue minus its explicit costs and depreciation. The accounting profit is the number that Kathy has to report on her income tax forms and that she would be obliged to report
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Unformatted text preview: to anyone thinking of investing in her business. economic profit —the revenue she receives minus her opportunity cost, which may include implicit as well as explicit costs. Optimal quantity of activity occurs when the graphs of mariginal cost and marginal benefit intersect In this example, the $250 that has already been spent and cannot be recovered is what economists call a sunk cost. Sunk costs should be ignored in making decisions about future actions because they have no influence on their costs and benefits....
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