Lecture 2: Economic Costs

Profit

The difference between total revenue and total cost

Which symbol is used for profit

pi (π)

Total revenue

The firm’s total receipts from the sale of its goods and services

Total revenue equation

Price * Quantity

Profit equation

Total revenue - total cost

Explicit cost

A cost incurred by running a business that involves cash outflows

Implicit cost

A cost incurred by running a business that does not involve cash outflows

Accounting costs

The cost accountants used to keep a firm’s financial records

Opportunity cost

Represents the value of the best alternative foregone when making a choice

Inventory

Current market price

Sunk cost

A cost that cannot be recovered because it was paid or incurred in the past

Sunk cost fallacy

Someone continues an endeavor even though the current cost outweighs the benefits because they feel they invested too much to quit

Sunk cost fallacy example

Watch a boring movie to the end, staying in an unhappy relationship cause u already put so much time into it, etc.

Capital assets

Long-term asset that is used by a business to generate income

3 different uses for capital assets

• Use it for the company

• Sell it at a price and invest the money at the highest rate

• Rent with profits

Rent with profits equation

(π)rent = payment - economic depreciation

Investment equation

(π)sell = P x r

Economic depreciation

The change in the market value of a capital asset

Competitive return

The opportunity cost of the owner’s funds (F) invested in a compant

Competitive return equation

(π)competitive return = F x r

Time

Salary constitutes an explicit opportunity cost

What is included in making an olympic triathlete

Coaching, equipment, recovery, travel, training camps, lodging, and nutrition

Annual cost of producing an olympic triathlete can surpass

100K

Many sports-related costs have been covered by

USA triathlon

A tier 1 athlete of US national team receives a - stipend

20K

A tier 2 athlete of US national team receives a - stipend

15K

A tier 3 athlete of US national team receives a - stipend

9K

Aspiring US elites who don’t qualify or are not selected for programs typically have to

Pay their own way in the sport