Chapter_9_-_Making_Decisions - 1 Chapter 9 Making decisions...

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1 What we will learn in this chapter How economists model decision making by individuals and firms; The importance of implicit as well as explicit costs in decision making; The difference between accounting and economic profit; The difference between “either-or” and “how much” decisions; The principle of marginal analysis; What sunk costs are and why they should be ignored; How to make decisions in cases where time is a factor. Opportunity cost and decisions In chapter 1, we saw that because resources were scarce, the true cost of anything is its __________that is, the real cost of something is what you give up to get it. Thinking in terms of _______________ is crucial in decision making. Let’s see why! Explicit versus implicit cost What exactly is the cost of an additional year in college? (In KD) (In KD) Tuitions 5,000 Foregone salary 30,000 Books and supplies 700 Computer 300 An _______________is a cost that involves actually spending money. An _______________is a cost does not require spending money, it is measured by the value, in dinar terms, of benefits that are foregone. Ignoring the _______________of an action can lead to a seriously misguided decision. If Bill Gates had stayed in college, what would have been his implicit cost? The same is true for businesses! Chapter 9 Making decisions
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2 Accounting profit versus economic profit In this sub-section and the following section, we will consider the case of Sumaya and Amer, who own a small restaurant in Mahboola. Sumaya used to be a chef at a famous restaurant downtown and Amer worked at a bank. This year, the couple made kd150000 in revenue. Knowing that they own the restaurant’s equipment (appliances, furniture), they have to pay some expenses out of that revenue: cost of food ingredients and other supplies and the cost of wages for her employees. This year, these expenses amount to kd60000. What is the obvious profit the couple made this year? What does the accountant say about that? Definitions _____________________ of a business is the business’s revenue minus the explicit cost and depreciation. It is the number reported on the income tax forms. What if the couple wants to decide whether to carry on with the business or do something
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This note was uploaded on 12/12/2011 for the course ECON 11 taught by Professor Mah during the Spring '11 term at American University of Kuwait.

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Chapter_9_-_Making_Decisions - 1 Chapter 9 Making decisions...

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