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The purpose of calculating economic profits (and thus, opportunity costs) is to aid in better business decision-making through the inclusion of opportunity costs. In this way, a business can evaluate whether its decision and the allocation of its resources is cost-effective or not and whether resources should be reallocated.
The production possibilities frontier (PPF) for guns versus butter. Points like X that are outside the PPF are impossible to achieve. Points such as B, C, and D illustrate the trade-off between guns and butter: at these levels of production, producing more of one requires producing less of the other.
Microeconomics is closely related to Managerial economics through areas such as; consumer demand and supply, opportunity cost, revenue creation and cost minimization. [5] Managerial economics inculcates the application of microeconomics application and makes use of economic theories and methods in analyzing a business and its management.
Opportunity cost is also often defined, more specifically, as the highest-value opportunity forgone. So let's say you could have become a brain surgeon, earning $250,000 per year, instead of a ...
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The example used above (which demonstrates increasing opportunity costs, with a curve concave to the origin) is the most common form of PPF. [13] It represents a disparity, in the factor intensities and technologies of the two production sectors.
Lipsey (1975) uses the example of a firm sitting on an expensive plot worth $10,000 a month in rent which it bought for a mere $50 a hundred years before. If the firm cannot obtain a profit after deducting $10,000 a month for this implicit cost, it ought to move premises (or close down completely) and take the rent instead. [ 1 ]
Total variable cost (TVC) is the same as variable costs. [5] Fixed cost (TFC) are the costs of the fixed assets those that do not vary with production. [6] Total fixed cost (TFC) Average cost (AC) are total costs divided by output. AC = TFC/q + TVC/q Average fixed cost (AFC) is equal to total fixed cost divided by output i.e. AFC = TFC/q. The ...