Unformatted text preview: explicit items can be verified Profit determines people’s behavior.
Economists want to explain behavior, and
since implicit costs affect people’s
behavior, economists use economic costs 10:37:38 21 Economic profit
Accounting profit 10:37:38 Pitfall 2: Ignoring Opportunity Costs
• It will almost always be instructive to translate
questions like economic
profit "Should I do x?"
into ones like
"Should I do x or y?" accounting profit
revenue implicit cost
explicit cost 10:37:38 explicit cost 22 accounting
cost 23 • In the latter question, y is simply the most highly
valued alternative to doing x.
10:37:38 24 4 Example 1.10. Should I go skiing today? Example 1.10. Should I go skiing today? • From experience you can confidently say that a
day on the slopes is worth $50 to you.
• The charge for the day is $30 (which includes
bus fare, lift ticket, and equipment).
• But this is not the only cost of going skiing. You
must also take into account the value of the
most attractive alternative you will forego by
heading for the slopes.
10:37:38 25 10:37:38 26 Example 1.10. Should I go skiing today? Example 1.10. Should I go skiing today? • Suppose that if you don't go skiing, you will work
at your new job as a research assistant for one
of your professors. C(x) = cost of skiing plus value of forgone earnings • The job pays $40 dollars per day, and you like it
just well enough to have been willing to do it for
• "Should I go skiing or stay and work as a
10:37:38 = $30 + $40
B(x) = $50 < C(x),
So don't go skiing. 27 10:37:38 28 Remark #1
Project A: benefit (A) > cost (A) ?? 彐 Surplus (A) > 0
Project B: benefit (B) > cost (B) ?? 彐 Surplus (B) > 0 Cost
measurements Project C: benefit (C) > cost (C) ?? 彐 Surplus (C) > 0
Project D: benefit (D)...
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- Spring '14
- Economics, Mankiw