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Explicit Cost
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A cost that requires an outlay of money
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Implicit Cost
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A cost that does not require the outlay of money; it is measured by the value, in dollar terms, of forgone benefits
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Accounting Profit
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Revenue minus explicit cost
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Economic Profit
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Revenue minus the opportunity cost of resources used; usually less than the accounting profit
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Capital
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The total value of assets owned by an individual or firm- physical assets plus financial assets
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Implicit Cost of Capital
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The opportunity cost of the use of one's own capital- the income earned if the capital had been employed in its next best alternative use
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Principle of "Either-Or" Decision Making
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The principle that, in a decision between two activities, the one with the positive economic profit should be chosen
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Marginal Cost
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The additional cost incurred by producing one more unit of a good or service
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Increasing Marginal Cost
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Each additional unit costs more to produce than the previous one
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Marginal Cost Curve
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A graphical representation showing how the cost of producing one more unit depends on the quantity that has already been produced
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Constant Marginal Cost
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Each additional unit costs the same to produce as the previous one
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Decreasing Marginal Cost
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Each additional unit costs less to produce than the previous one
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Marginal Benefit
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The additional benefit derived from producing one more unit of a good or service
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Decreasing Marginal Benefit
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Each additional unit of an activity yields less benefit than the previous unit
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Marginal Benefit Curve
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A graphical representation showing how the benefit from producing one more unit depends on the quantity that has already been produced
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Optimal Quantity
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The quantity that generates the highest possible total net gain
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Profit-Maximizing Principle of Marginal Analysis
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The proposition that in a profit-maximizing "how much" decision the optimal quantity is the largest quantity at which marginal benefit is greater than or equal to marginal cost
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Sunk Cost
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A cost that has already been incurred and is not recoverable
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Rational
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Describes a decision maker who chooses the available option that leads to the outcome he or she most prefers
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Bounded Rationality
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A basis for decision making that leads to a choice that is close to but not exactly the one that leads to the best possible economic outcome; the "good enough" method of decision making
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Risk Aversion
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The willingness to sacrifice some economic payoff in order to avoid a potential loss
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Irrational
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Describes a decision maker who chooses an option that leaves him or her worse off than choosing another available option
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Mental Accounting
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The habit of mentally assigning dollars to different accounts so that some dollars are worth more than others
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Loss Aversion
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Oversensitivity to loss, leading to unwillingness to recognize a loss and move on
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Status Quo Bias
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The tendency to avoid making a decision
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