Chapter 9 - Decision Making By Individuals And Firms Flashcards
(21 cards)
Explicit cost
Cost that requires an outlay of money
Implicit cost
Does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone
Capital
Total value of assets owned by an individual or firm
“Either-or” principle
When faced with an “either-or” choice between two activities, choose the one with the positive economic profit
Marginal analysis
Comparing the benefit of doing a little bit more of something with the cost of doing more of something - comparing marginal benefit with marginal cost
Marginal cost
The additional cost incurred by producing one more unit of that good or service
Increasing marginal cost
Each additional unit cost more to produce than the previous one
Constant marginal cost
Each additional unit cost the same to produce as the previous one
Decreasing marginal cost
Each additional unit costs less to produce than the previous one
Marginal benefit
The additional benefit derived form producing one more unit of a good or service
Optimal quantity
The quantity that generated the highest possible total profit
Profit maximizing principle of marginal analysis
The larger quantity at which the marginal benefit is greater than or equal to marginal cost
Sunk cost
A cost that has already been incurred and is not recoverable
Four reasons why people might rationally choose to be worse off
- Concerns about fairness
- Nonmonetary rewards
- Bounded rationality
- Risk aversion
Misconceptions of opportunity costs
One of seven misconceptions
People tend to ignore opportipunity costs when they are nonmonetary, sunk cost fallacy - believing that a sunk cost is an opportunity cost
Overconfidence (one of seven misconceptions in decision making)
We tend to think we know more than we actually do
Unrealistic expectations about future behaviour (one of seven misconceptions in decision making)
Most of us are overly optimistic about our future behaviour and level of discipline
Counting dollars unequally (one of seven misconceptions in decision making)
Mental accounting: the habit of mentally assigning dollars to different accounts so that some dollars are worth more than others
Loss aversion (one of seven misconceptions in decision making)
An over sensitivity to loss that leads to an unwillingness to recognize a loss and move on
Framing bias (one of seven misconceptions in decision making)
The tendency to make a decision based on how the choices are presented
Status quo bias (one of seven misconceptions in decision making)
The tendency to avoid making a decision all together
