Making 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 benefits that are forgone.

The accounting profit of a business is the business’s revenue minus the explicit cost and depreciation.

The economic profit of a business is the business’s revenue minus the opportunity cost of its resources. It is usually less than the accounting profit.

The capital of a business is the value of its assets—equipment, buildings, tools, inventory, and financial assets.

The implicit cost of capital is the opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way.

A “ how much” decision is made using marginal analysis, which involves comparing the benefit to the cost of doing an additional unit of an activity.

The marginal cost of producing a good or service is the additional cost incurred by producing one more unit of that good or service.

Production of a good or service has constant marginal cost when each additional unit costs the same to produce as the previous one.

The marginal cost curve shows how the cost of producing one more unit depends on the quantity that has already been produced.

Production of a good or service has increasing marginal cost when each additional unit costs more to produce than the previous one.

The marginal benefit of a good or serv- ice is the additional benefit derived from producing one more unit of that good or service.

There is decreasing marginal benefit from an activity when each additional unit of the activity produces less benefit than the previous unit.

The marginal benefit curve shows how the benefit from producing one more unit depends on the quantity that has already been produced.

The optimal quantity is the quantity that generates the maximum possible total net gain.

The principle of marginal analysis says that the optimal quantity is the quantity at which marginal benefit is equal to marginal cost.

A sunk cost is a cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decisions about future actions.

When someone borrows money for a year, the interest rate is the price, calculated as a percentage of the amount borrowed, charged by the lender.

The present value of $1 realized one year from now is equal to $1/(1 + r): the amount of money you must lend out today in order to have $1 in one year. It is the value to you today of $1 realized one year from now.

Amount received in one year from lending $V = $V × (1 + r)
Amount received in two years from lending $V = $V × (1 + r) × (1 + r) = $V × (1 + r)2

The net present value of a project is the present value of current and future benefits minus the present value of current and future costs.

⇐ Предыдущая 1 234 Следующая ⇒