What is produced? Is it different from the competitors?
How are goods produced? How much is produced?
At which price?
Principle that an activity should be pursued to the point where marginal benefits equal marginal costs
Marginal Benefits (MB)
The additional benefits gained from the last unit of activity
Marginal Costs (MC)
The additional costs associated with the last unit of an activity
Weigh the costs and benefits that vary with the consequence of a decision and only costs and benefits that vary with the decision.
Fixed Cost Fallacy
You consider costs and benefits that do not vary with the consequences of your decision, you make decisions using irrelevant costs and benefits
Fixed Cost Fallacy Example
Overhead is a fixed or sunk cost. Do not vary with outpout decisions and should be ignored in the decision-making process
Big Fixed Cost
If the "overhead" charge is big enough to deter an otherwise profitable product launch, you commit the fixed-cost fallacy
Overhead charges are analogous to
a "tax" on launching a new product
It occurs when you ignore relevant costs, i.e., those costs that do vary with the consequences of your decision
Slope of the (Total) Revenue Curve
Costs that do not vary with the quantity of output. Fixed costs are avoidable only in the long run
Costs that vary with the quantity of output. Variable costs are avoidable
The additional costs assocaited with the last unit of an activity
Increasing Marginal Costs
The condition where each additional unity of an activity is more expensive than the last
A cost that can no longer be avoided. Once they are sunk they are irrelevant to any future decision making and should not be accounted for in market exit decisions
Equal to the value of a foregone opportunity. The cost of a item, or project, is what you give up to get that item, or undertake that project.