KWChapter7_StudentSlides_compressed.ppt

1、CHAPTER 7 Making Decisions PowerPoint Slides by Can Erbil 2004 Worth Publishers, all rights reserved,2,Case study,A tale of two invasions-refer to page 160,3,What you will learn in this chapter,How economists model decision making by individuals and firms The importance of implicit as well as explic

2、it costs in decision making The difference between accounting profit and economic profit, and why economic profit is the correct basis for decisions The difference between “eitheror” and “how much” decisions The principle of marginal analysis What sunk costs are and why they should be ignored How to

3、 make decisions in cases where time is a factor,4,Key contents:,Analysis of costs Analysis of margin,5,Opportunity Cost and Decisions,An explicit cost is a cost that involves actually laying out money. An implicit cost does not require an outlay of money; it is measured by the value, in dollar terms

4、, of the benefits that are forgone. 由放弃的收益价值来衡量.,6,Opportunity Cost of an Additional Year of School,7,Accounting Profit Versus Economic Profit,The accounting profit of a business is the businesss revenue minus the explicit costs and depreciation. The economic profit of a business is the businesss re

5、venue minus the opportunity cost of its resources. It is often less than the accounting profit.,8,Capital,The capital of a business(企业的资本) is the value of its assetsequipment, buildings, tools, inventory, and financial assets. The implicit cost of capital is the opportunity cost of the capital used

6、by a businessthe income the owner could have realized from that capital if it had been used in its next best alternative way. (企业使用资源的机会成本,即资源所有者如将资源用到别处可能得到的最大收入),9,Profits at Kathys copy Shop,10,“How Much” Versus “EitherOr” Decisions,“How much” decisions: How many days before you do your laundry?

7、How many miles do you go before an oil change in your car? How many jalapenos(墨西哥胡椒) on your nachos? How many hours of sleep before the midterm exam? “Eitheror” decisions: An order of nachos(烤干酪辣味玉米片) or a sandwich? Buy a car or not? Go out or study for the midterm exam? Invade at Calais or at Norma

8、ndy? Run your own business or work for someone else?,11,Marginal Cost,The marginal cost of an activity is the additional cost incurred by doing one more unit of that activity.,12,Increasing Marginal Cost,Felixs marginal cost is greater the more lawns he has already mowed. That is, each time he mows

9、a lawn, the additional cost of doing yet another lawn goes up. There is increasing marginal cost（边际成本递增） from an activity when each additional unit of the activity costs more than the previous unit.,13,Felixs Marginal Cost of Mowing Lawns: The Marginal Cost Curve,14,Marginal Benefit,The marginal ben

10、efit（边际收益） from an activity is the additional benefit derived from undertaking one more unit of that activity.,15,Decreasing Marginal Benefit,Each additional lawn mowed produces less benefit than the previous lawn with decreasing marginal benefit, each additional unit produces less benefit than the

11、unit before. There is decreasing marginal benefit（边际收益递减） from an activity when each additional unit of the activity produces less benefit than the previous unit.,16,Felixs Marginal Benefit of Mowing Lawns: The Marginal Benefit Curve,17,Felixs Net Gain from Mowing Lawns,18,Marginal Analysis,The opti

12、mal quantity(最优量) of an activity is the level that generates the maximum possible total net gain(净利润;净收益). The principle of marginal analysis（边际分析原理） says that the optimal quantity of an activity is the quantity at which marginal benefit is equal to marginal cost.,19,Felixs Net Gain from Mowing Lawn

13、s,20,The Optimal Quantity,The optimal quantity of an activity is the quantity at which the marginal benefit curve and the marginal cost curve intersect. Here they intersect at approximately 5 lawns: the total net gain is maximized at 5 lawns, generating $66.50 in net gain for Felix.,21,The Optimal Q

14、uantity,If MRMC MRMC MR=MC,22,Sunk Cost,A sunk cost is a cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decisions about future actions. Sunk costs should be ignored in making decisions about future actions because they have no influence on their costs and

15、 benefits. “Theres no use crying over spilled milk”,23,An Example A firm pays $500,000 for an option（期权） to buy a building. The cost of the building is $5.5 million. The firm finds another building for $5.25 million. Which building should the firm buy?,Measuring Cost:Which Costs Matter?,24,The Conce

16、pt of Present Value（现值）,When someone borrows money for a year, the interest rate（利率） is the price, calculated as a percentage of the amount borrowed, charged by the lender. The interest rate can be used to compare the value of a dollar realized today with the value of a dollar realized later The pre

17、sent value of $1 realized one year from now is equal to $1/(1 + r): the amount of money you must lend out today in order to have $1 in one year. It is the value to you today of $1 realized one year from now.,25,Present Value (continued),Lets call $V the amount of money you need to lend today, at an

18、interest rate of r in order to have $1 in two years. So if you lend $V today, you will receive $V (1 + r) in one year. And if you re-lend that sum for yet another year, you will receive $V (1 + r) (1 + r) = $V (1 + r)2 at the end of the second year. At the end of two years, $V will be worth $V (1 +

19、r)2; If r = 0.10, then this becomes $V (1.10)2 = $V (1.21).,26,Present Value (continued),What is $1 realized two years in the future worth today? In order for the amount lent today, $V, to be worth $1 two years from now, it must satisfy this formula: $V (1 + r)2 = $1 If r = 0.10, $V = $1/(1 + r)2 = $