pre-lecture unit 8 cost anaylsis

cost analysis

profit

total revenue - total costs

how are costs classified

• explicit vs implicit costs

What is another term used for explicit costs

accounting costs

what is an explicit costs

expenses paid directly to some other economic entity

what is an example of an explicit cost

• rent

• wages

• raw materials

how are explicit costs documented

by reciept or invoice

what is an implicit costs

• Opportunity cost of using resources in a business

what is one example of an implicit costs

• forsaking the 50k of a job to open a new restaurant

• The 50k would be the implicit cost

why does implicit cost matter

• Not fully taking them into account is a mistake that leads to business failure

what is accounting proft

total revenue - explicit costs

what is economic proft

total revenue - (explicit + implicit )

what does 0 economic profit mean

A company is doing as well as it could if it had pursued the next best alternative

what is a fixed cost

• expenses that do not change with the amount of output in the short run

what is an example of a fixed cost

lease payment (doesn’t matter 1 customer or 100 the lease payment is the same)

what is a sunk cost

once paid it cannot be recovered

what is an example of a sunk cost

tuition payment sunk costs no refund if you drop out

what is a variable cost

expenses that increase with the amount of production

what is an example of a variable costs

• raw materials

• utlities

• labor wages

• greater output requires more resources to be used

what is total cost

sum of fixed + variable cost

used in profit formula

what is a marginal cost

• Additional cost of producing one more unit of a good

what is an average cost

• Helps determine the overall efficiency of the business

• 
  

whats the equation for an average cost

variable cost divided by output

profti maximizing rule

marginal cost = marginal revenue

maximizing profits

Economic profit happens when price > average costs

normal rate of return

just enough to keep investors happy and stay in business when economic profit is 0

econ proft > 0

supernormal gains (beating the market )

econ profit =0

normal profit (doing just as well as the alternative)

econ profit < 0

economic loss (should have picked alternative)