Econ 4001.01 1st Edition Lecture 10 Outline of Last Lecture II. Perfect Substitutes and Complements: IsoquantsIII. Returns to scale: Changes in input efficiencyIV. Review for ExamOutline of Current Lecture II. Defining Total Revenue and Total CostA. Definition of each III. Explicit vs. Implicit CostsIV. Accounting vs. Economic ProfitV. Sunk costs vs. Fixed Costsa. Sunk cost fallaciesCurrent LectureThe Cost of Production- Defining Total Revenue and Total Costo Total revenue (TR)= P*Q The amount a form receives for selling its producto Total Cost (TC) Market value for selling all inputs- Explicit and Implicit Costso Explicit cost=all input costs that involve an expenditure of money; also called out-of-pocket costso Implicit costs= input costs that do not involve an expenditure of money; these are opportunity costso Total costs= explicit+implicit costso Examples of Implicit costs: Alternative wages or earnings of owner/entrepreneur Cost of capital used to fund business Value of land used in farming Any other input cost not appearing on accounting statements- Economic vs. Accounting Profito Economic profit=total revenue minus total costs Explicit and implicit costs are includedThese 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. “true” measure of economic benefit to owner of businesso Accounting profit= total revenue minus explicit costs Implicit costs are excluded This will almost always be larger than economic profit- Sunk Costs vs. Fixed Costso Sunk costs are expenditures that have been made and cannot be recovered Examples: software, video game development costs, specialized equipment with no other useo Fixed costs are expenditures that do not depend on the level of output; some fixed costs are sunk, not all Examples: insurance, utilities, management salaries, machinery with high resale value, lando Sunk cost fallacies In making economic decisions, we should ignore sunk costs-they are irrelevant for future actions Example (P+R) Northwestern considers moving Law School from downtown Chicago to Evanston; decide not to because they already own the land downtown but that is not a sunk cost(they could sell that land)- Businesses Focus on Different Aspects of Costso Computer, cell phone, tablet making firms: Most of their costs are variable, including labor, materials, and sub-assemblies,
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