Decision Making by Individuals and Firms

These flashcards cover key concepts from the lecture on decision making by individuals and firms, focusing on costs, benefits, profits, and common decision-making mistakes.

What is the primary focus of decision making according to the lecture?

Good decision making begins with accurately defining costs and benefits.

What are explicit costs?

Explicit costs are costs that require an outlay of money.

What are implicit costs?

Implicit costs do not require an outlay of money and are measured by the value of benefits that are forgone.

How is accounting profit calculated?

Accounting profit is calculated as revenue minus explicit costs.

How is economic profit defined?

Economic profit is defined as revenue minus explicit costs minus implicit costs.

In decision making, why is economic profit preferred over accounting profit?

Economic profit shows a more complete picture of costs and helps businesses and individuals make better-informed decisions.

What does zero economic profit indicate in a job transition scenario?

It indicates that one's income covers all costs, including forgone wages, meaning the decision does not result in a financial gain or loss.

What is the principle behind 'either-or' decision making?

When faced with an 'either-or' choice, choose the option with the positive economic profit.

What is marginal cost?

Marginal cost is the additional cost incurred by producing one more unit of a good or service.

What does marginal benefit refer to?

Marginal benefit refers to the additional benefit derived from producing one more unit of a good or service.

What are sunk costs?

Sunk costs are costs that are already incurred and not recoverable, which should be ignored in future decisions.

What are some reasons people might rationally choose a worse payoff?

Concerns about fairness, nonmonetary rewards, bounded rationality, and risk aversion.

What is loss aversion in decision-making?

Loss aversion is an oversensitivity to loss that leads to an unwillingness to recognize a loss and move on.

What is framing bias?

Framing bias is the tendency to make a decision based on how the choices are presented.

Why do economists continue to use rational models despite irrational behavior?

Rational models provide robust predictions, market forces compel rational behavior over time, and make modeling simpler.