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25 Cards in this Set

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a cost that requires an outlay of money

explicit cost


a cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone

implicit cost


equal to revenue minus explicit cost

accounting profit

equal to revenue minus the opportunity cost of resources used. It is usually less than the accounting profit

economic profit

the total value of assets owned by an individual or firm- physical assets plus financial assets

capital

the opportunity cost of the use of one's own capital- the income earned if the capital had been employed in its next best alternative use

implicit cost of capital

when faced with an "either-or" choice between two activities, choose the one with the positive economic profit

principle of "either-or" decision making

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

the marginal cost

when each additional unit costs more to produce than the previous one

increasing marginal cost

shows how the cost of producing one more unit depends on the quantity that has already been produced

marginal cost curve

when each additional unit of a good or service costs the same to produce as the previous one

constant marginal cost

when each additional unit of a good or service costs less to produce than the previous one

decreasing marginal cost

the additional benefit of a good or service derived from producing one more unit of that good or service

the marginal benefit

an activity when each additional unit of the activity yields less benefit than the previous unit

decreasing marginal benefit

shows how the benefit from producing one more unit depends on the quantity that has already been produced

marginal benefit curve

the quantity that generates the highest possible total profit

optimal quantity

when faced with a profit-maximizing "how much" decision, the optimal quantity is the largest quantity at which the marginal benefit is greater than or equal to marginal cost

profit-maximizing principle of marginal analysis

a cost that has already been incurred and is nonrecoverable. This type of cost should be ignored in decisions about future actions

sunk cost

a type of decision maker that chooses the available option that leads to the outcome he or she most prefers

a rational decision maker

a decision maker operating with this makes a choice that is close to but not exactly the one that leads to the best possible economic outcome

bounded rationality

the willingness to sacrifice some economic payoff in order to avoid a potential loss

risk aversion

this type of decision maker chooses an option that leaves him or her worse off than choosing another available option

irrational decision maker

the habit of mentally assigning dollars to different accounts so that some dollars are worth more than others

mental accounting

an oversensitivity to loss, leading to unwillingness to recognize a loss and move on

loss aversion

the tendency to avoid making a decision and sticking with the status quo

status quo bias