Sellers

• are motivated by profit
• Price
  • Discounts & rebates
  • Returns
  • Allowances
• Cost
  • Opportunity Cost
  • Implicit cost and explicit cost
  • Accounting profit vs economic profit
  • Sunk cost

Costs

Opportunity Cost

• In economics, the cost of any resource is its opportunity cost.
• The opportunity cost is what a seller/producer/firm gives up to use a particular resource.
• Two kinds of resources:
  • Transacted in a market (market supplied)
  • non-transacted (owner-supplied resources)
• The value of the next best alternative
• The set of alternate activities: $\{x_1,x_2,…x_n\}$.
• Which activity to pick?
  • Net benefit from i

Explicit Cost and Implicit Cost

• Explicit Cost: Opportunity cost for a resource involving monetary transaction
• Implicit Cost: Opportunity cost of using a resource that is not being transacted in a market

<aside> 💡 do not ignore implicit cost while making a business decision

</aside>

Accounting Profit and Economic Profit

• Accounting costs: The costs used by accountants to keep a business’ financial records
• Accounting Profit: Revenue - Explicit Cost