Lectures_micro / Microeconomics_presentation_Chapter_9
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chapter:
9
>> Making Decisions
Krugman/Wells
Economics
©2009 Worth Publishers
WHAT YOU 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 profit and
economic profit, and why economic profit is the correct basis for decisions
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
An explicit cost is a cost that involves actually laying out money.
An implicit cost does not require an outlay of money; it is measured by the value, in dollar terms, of the benefits that are forgone.
Opportunity Cost of an Additional Year of School
Accounting Profit Versus Economic Profit
The accounting profit of a business is the business’s revenue minus the explicit costs and depreciation.
The economic profit of a business is the business’s revenue minus the opportunity cost of its resources. It is often less than the accounting profit.
Capital
The capital of a business is the value of its assets.
The implicit cost of capital is the opportunity cost of the capital used by a business.
Profits at Babette’s Cajun Cafe
“How Much” Versus “Either–Or” Decisions
Marginal Cost
The marginal cost of producing a good or service is the additional cost incurred by producing one more unit of that good or service.
Constant Marginal Cost
For every additional chicken wing per serving, Babette’s marginal cost is $0.80. Babette’s portion size decision has what economists call constant marginal cost: each chicken wing costs the same amount to produce as the previous one.
Production of a good or service has constant marginal cost when each additional unit costs the same to produce as the previous one.