MECO Lesson 3 Flashcards
are associated with decisions, not activities.
Cost
The _____________ ____ of an alternative is the profit you
give up to pursue it
opportunity cost
In computing costs and benefits, consider all costs and
benefits that vary with the consequences of a decision
and only those costs and benefits that vary with the
consequences of the decision. These are the ________
_____ and _________ of a decision.
relevant costs and benfits
do not vary with the amount of output.
Fixed Costs
change as output changes. Decisions that
change output will change only ________ _____.
variable costs
does not necessarily correspond to real or
economic profit.
Accounting profit
- means that you consider irrelevant costs. A common fixed-cost fallacy is to
let overhead or depreciation costs influence short-run decisions. - letting irrelevant costs influence a decision
fixed cost-fallacy/sunk-cost fallacy
- occurs when you ignore relevant costs. A common hidden-cost fallacy is to ignore the opportunity cost of capital when making investment or shutdown decisions.
- ignoring relevant costs when making a
decision
hidden cost-fallacy
- is a measure of financial performance that makes
visible the hidden cost of capital. - net operating profit after taxes minus the
cost of capital times the amount of capital utilized
Economic Value Added (EVA)
paid to its suppliers for product ingredients
Costs
like salaries to factory managers and
marketing expenses
General operating expenses
related to investments in buildings and
equipment
Depreciation expenses
payments on borrowed funds
Interest
expect a certain return on their money (they could have
invested elsewhere)
Stockholders
should recognize whether firm is generating a return beyond
shareholders expected return
Profit
recognizes these implicit costs; accounting profit recognizes only explicit costs
Economic profit
is what you give up
(forgone profit) to pursue it.
opportunity cost
means that taking ownership of item causes owner to increase value she places on the item.
endowment effect
individuals would pay more to avoid loss
than to realize gains
loss aversion
a tendency to gather information that confirms your prior beliefs, and to ignore information that contradicts them
confirmation bias
relates the effects of how information is presented or “framed”
anchoring bias
the tendency to place too much confidence in the accuracy of your analysis
Overconfidence bias
