Week 2 Flashcards
Identifying business opportunities, understanding costs and benefits
Value
Willingness to pay
Desire for the product + income to purchase it
Wealth
- Value of assets owned
- Wealth is created when assets are moved from lower to higher-valued uses
- Voluntary
Voluntary transactions - E.g
The buyer values the shop at £1,300,000
The seller values the shop at £1,200,000
Must “split” the price - £1,280,000.
Buyer surplus - Buyer’s value - Price = £20,000
Seller surplus = the price minus the seller’s value, £80,000
Total surplus = buyer + seller surplus, £100,000 = difference in values
Opportunity cost
Next best alternative given up
Difference between accounting v economic cost
Economic profit recognises the implicit costs whereas profit recognises only explicit costs
Explicit costs
direct payments made by a business, such as wages, rent, and materials, that are easily quantifiable and identifiable
Implicit costs
a cost that a company incurs when it uses resources it already owns, without paying for their use e.g payment to shareholders
Fixed costs
Do not vary with output
Variable costs
Change when output changes
Sunk cost
Cost which has already been paid and cannot be recovered
Sunk- cost fallacy
Reluctant to abandon a strategy or course of action because they have invested heavily in it e.g watching a movie at the cinema but already paid
Hidden-cost fallacy
Ignoring relevant costs which vary with the consequences of your decision
Hidden cost of capital - EVA
EVA - economic value added calculates the profits that remain after deducting a company’s cost of capita
