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Cost Benefit Analysis
Weighing the costs and benefits of an action in order to maximize the net benefit from the action.
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Utility
Satisfaction realized from the consumption of a good or service or an action.
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Opportunity Costs
The cost of acquiring a good or service or taking an action measured in terms of the value of the opportunity or alternative forgone.
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Marginal Benefit (marginal utility)
The change in total satisfaction from consuming an additional unit of a good, service or activity.
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Total Benefit (total utility)
The total amount of satisfaction received from consuming a specified number of units of a good, service or activity.
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Law of Diminishing Marginal Utility
As additional units of an item are consumed, beyond some point each successive unit of the item consumed will add less to total utility than was added by the unit consumed just before it.
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Total Cost
The cost of producing a specified number of units of a good, service or activity.
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Marginal Cost
The change in total cost from each additional unit of a good, service or activity produced.
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Net Benefit`
The result when total cost is subtracted from total benefit.
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Net Benefit Maximizing Rules
Net benefit is maximized where total benefit exceeds total cost by the greatest amount or where marginal benefit equals marginal cost.
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Explicit Costs
Payments that a business makes to acquire factors of production, such as labor, raw materials and machinery. Direct payments or actual dollar outlays made by a business for a workforce, materials, machinery, equipment and so forth.
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Implicit Costs
The opportunity costs to business owners from using their resources in the business rather than in an alternative opportunity; must be recovered to keep the business in operation; normal profit.
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Normal Profit
Profit necessary to recover implicit costs and keep a business in operation; considered to be an economic cost of production.
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Economic Cost of Production
Includes all explicit and implicit costs of producing a good or service.
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Excess Profit (Economic Profit)
Profit beyond normal profit; not considered a cost of production.
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Total Revenue
Revenue received from selling a certain quantity of an item; calculated by multiplying the price of an item by the quantity demanded at that price.
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Marginal Revenue
The change in total revenue when one more (or additional) unit of an item is demanded.
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Profit or Loss
The result when a business subtracts its total cost from its total revenue.
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Profit Maximizing Rules
Profit is maximized at the output level where total revenue exceeds total cost by the greatest amount, or where marginal reveue equals marginal costs.
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Externality
The effect of an action on a person or thing that was not one of the parties involved in the action.
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Positive Externality
An externality that creates a benefit for others.
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Negative Externality
An externality that creates a cost for others.
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Social Benefits and Costs
The total effect on society from the private benefits, private costs, and externalities of an action.
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Public Choice
The study of the economic motives and attitudes of voters and public officials in collective decision making.
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Rational Ignorance
Choosing to remain uninformed because the marginal cost of obtaining the information is higher than the marginal benefit from knowing it.
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Special Interest Group
People who share a common position on a particular issue and actively promote that position.
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