Exam 2 Flashcards
Accounting profit
is equal to revenue minus explicit cost.
Economic profit
is equal to revenue minus the opportunity cost of resources used. It is usually less than the accounting profit.
Capital
is the total value of assets owned by an individual or firm—physical assets plus financial assets.
implicit cost of capital
is the opportunity cost of the use of one’s own capital—the income earned if the capital had been employed in its next best alternative use.
explicit cost
is a cost that requires an outlay of money.
implicit cost
does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone.
principle of “either–or” decision making,
when faced with an “either–or” choice between two activities, choose the one with the positive economic profit.
Marginal analysis
involves comparing the benefit of doing a little bit more of some activity with the cost of doing a little bit more of that activity.
marginal cost
is the additional cost incurred by producing one more unit of that good or service.
increasing marginal cost
when each additional unit costs more to produce than the previous one.
marginal cost curve
shows how the cost of producing one more unit depends on the quantity that has already been produced.
constant marginal cost
when each additional unit costs the same to produce as the previous one.
decreasing marginal cost
when each additional unit costs less to produce than the previous one.
marginal benefit
is the additional benefit derived from producing one more unit of that good.
decreasing marginal benefit
An activity when each additional unit of the activity yields less benefit than the previous
marginal benefit curve
Shows how the benefit from producing one more unit depends on the quantity that has already been produced.
optimal quantity
Is the quantity that generates the highest possible total profit.
profit-maximizing principle of marginal analysis
when faced with a “how-much” profit maximizing decision pick the optimal quantity that has a marginal benefit that’s ≥ marginal cost
sunk cost
A cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decisions about future actions.
util
is a hypothetical unit of utility (measures satisfaction)
marginal utility
is the change in total utility generated by consuming one additional unit of that good or service.
marginal utility curve
Shows how marginal utility depends on the quantity of a good or service.
principle of diminishing marginal utility
for each unit consumed, you get less satisfaction from it.
if two goods are complementary
The cores-price elasticity is less than zero
the %∆ Qdemand / %∆price
cross-price elasticity of demand
cross-price elasticity of demand
measures the effect of change in one good’s price on the quantity demand of the other good.
-Is equal %∆ in Qd of good/%∆ of other good
The relationship between an individual’s consumption bundle and his or her utility is called a:
Utility function
optimal consumption bundle
The combination of goods that maximizes total utility given a budget constraint is the
