marginal benefits, costs, and net benefits. opportunity cost and decisions an explicit cost is a...
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![Page 1: Marginal Benefits, Costs, and Net Benefits. Opportunity Cost and Decisions An explicit cost is a cost that involves actually laying out money. An implicit](https://reader035.vdocuments.site/reader035/viewer/2022062805/5697bfa31a28abf838c96d73/html5/thumbnails/1.jpg)
Marginal Benefits, Marginal Benefits, Costs, and Net Costs, and Net
BenefitsBenefits
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Opportunity Cost and DecisionsOpportunity 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. (e.g., consider opportunity cost)
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Opportunity Cost and DecisionsOpportunity Cost and Decisions
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Accounting Profit Versus Accounting Profit Versus Economic ProfitEconomic Profit
• Accounting profit = business’s revenue minus
– explicit costs – depreciation
• Economic profit = business’s revenue minus
–explicit costs–Depreciation–opportunity cost of its resources
Economic profit is usually less than accounting profit
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Making ‘How Much’ Decisions: Making ‘How Much’ Decisions: The Role of Marginal AnalysisThe Role of Marginal Analysis
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Marginal BenefitMarginal Benefit
• Marginal benefit: the additional benefit derived from one more unit of an activity
• Decreasing marginal benefit: when each additional unit of an activity produces less benefit than the previous one. (Think donuts!)
• Marginal benefit curve: shows benefit of each additional unit
• (Hint: wouldn’t this curve look suspiciously like the demand curve? Ahh… now you’re thinking ahead!)
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Marginal CostMarginal Cost• Imagine a pizza
restaurant, like Jalino’s that used to be across the street
• Marginal costs include costs for sauce, dough, toppings, energy
• At first, marginal cost falls as producing becomes more efficient (efficient labor use, buying in bulk, many pizzas in the same oven)
• Then producing gets less efficient with existing kitchen, staff, capital – and more marginal cost rises
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Marginal CostMarginal Cost• Marginal cost =
additional cost incurred by doing one more unit of an activity
• buying one more banana
• producing one more latte
• Increasing marginal cost: when each additional unit costs more than the previous unit
• Marginal cost curve shows the cost each additional unit of an activity
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Marginal AnalysisMarginal Analysis• The optimal quantity of
an activity is the level that generates the maximum possible total net gain.
• MB = MC• The principle of
marginal analysis says that the optimal quantity of an activity is the quantity at which marginal benefit is equal to marginal cost.
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The Optimal QuantityThe Optimal Quantity
The optimal quantity of an activity is the quantity at which the marginal benefit curve and the marginal cost curve intersect.
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Deadweight LossDeadweight Loss
Deadweight Loss: amount of benefit given up by failing to operate where marginal benefit equals marginal cost
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Net BenefitNet Benefit
Net Benefit: Total Benefits minus total costs minus deadweight loss