ECON 202 1st Edition Lecture 10 Outline of Last Lecture I Elasticity Outline of Current Lecture II Module 18 Decision Making III Implicit and Explicit Costs Current Lecture Decision Making More useful material within this course more real life Profit Total Revenue Total Cost Total Cost 2 Types of Cost 1 Explicit Cost a Requires some money outflow 2 Implicit Cost a What you give up like an opportunity cost idea more than money Example College Cost Explicit Costs Tuition 5 000 Books 1 000 Technology 500 Total 6 500 Implicit Costs Foregone Salary 30 000 Total 30 000 The true cost of going to college is 36 500 Profit Total Revenue Total Cost Two Measures of Profit 1 Accounting Profit Total Revenue Explicit Costs 2 Economic Profit Total Revenue Explicit Implicit a E Profit is almost always lower than accounting profit Example 4 Year College These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Explicit Costs 26 000 4 000 in Interest 30 000 Foregone Salary 120 000 Total Economic Cost 150 000 College increases earnings over your lifetime by 148 000 Accounting Profit 148 000 30 000 118 000 Economic Profit 148 000 150 000 2 000 If these numbers were accurate these numbers would convey that college is not worth it you are 2 000 worse of If you had 26 000 you are incurring an explicit cost or you could have earned interest on the money If economic profit is negative you are worse of You want to earn the highest profit possible Marginal Analysis Analysis of one more Marginal Cost Cost incurred from producing one more Marginal Cost Change in Total Cost Change in Quantity Example College Cost Quantity Total Cost Marginal Cost 0 0 None 1 30 000 30 000 2 70 000 40 000 3 130 000 60 000 4 220 000 90 000 Sunk Costs 1 Non recoverable cost 2 Does not matter from an economic perspective it shouldn t matter in your economic decisions going further Marginal Revenue Revenue from one more Marginal Revenue Change in Total Revenue Change in Cost Quantity Total Revenue Marginal Cost 0 0 None 1 300 000 300 000 2 450 000 150 000 3 540 000 90 000 4 600 000 60 000 Example College Cost Quantity MC MR Additional Profit 0 None None None 1 30 000 300 000 270 000 2 40 000 150 000 110 000 3 60 000 90 000 3 000 4 90 000 60 000 3 000 Optimal Decision 1 Profit is Maximized Marginal Revenue Marginal Cost 2 Or the Quantity where Marginal Revenue is still greater than Marginal Cost Cost of a Life a Life value is not infinite