Crash Course Economics Lecture Notes

Introduction

• Hosts: Adriene Hill & Jacob Clifford
• Economics models may not fully reflect real life.
• Microeconomics offers broad insights, aiding in decision-making.
• Economics helps understand the big picture, similar to a liberal arts education.

Economic vs. Accounting Profit

• Accounting Profit: Revenue minus explicit costs (out-of-pocket costs).
• Economic Profit: Revenue minus explicit and implicit costs (opportunity costs).
  • Example: A lawyer turns to running a pizza shop.
    • Accounting Profit: Revenue ($50,000) - Costs ($20,000) = $30,000.
    • Economic Profit: Considers lost lawyer income ($100,000), resulting in a $70,000 loss.
• Importance of considering implicit benefits and costs in decision-making.

Business Decision-Making

• Opportunity costs include intangible costs like time, alternative income, and personal time.
• Businesses assess potential revenue and production costs, including implicit costs.
• Competitive markets lead to minimal economic profit (normal profit).
  • Entry of competitors reduces profit until only normal profit remains.

Costs of Production

• Variable Costs: Change with the amount produced (e.g., ingredients, wages).
• Fixed Costs: Remain constant regardless of production level (e.g., rent, ovens).
• Total costs = Variable + Fixed costs.
• Average Cost: Total cost divided by number of units produced.
  • Falls initially as production increases due to spread of fixed costs.
  • Economies of scale: Larger production reduces average costs.

Economies of Scale

• Large companies benefit from reduced average costs through mass production.
• Dominance in industries can occur due to economies of scale.
• Example: Pizza restaurant with conveyor ovens vs. manual operations.

Profit Maximization

• Profit Maximization Rule: Produce where marginal revenue equals marginal cost (MR=MC).
• Marginal Revenue (MR): Additional revenue from selling one more unit.
• Marginal Cost (MC): Additional cost of producing one more unit.
  • Produce if MR > MC; stop if MR < MC.
• Increasing marginal costs are typical in production.

Law of Diminishing Marginal Returns

• Specialization reduces marginal cost initially but has limits.
• Additional output decreases with increased variable resources like labor.
• Example: Too many workers lead to inefficiency ("too many cooks in the kitchen").

Sunk Costs

• Costs already incurred and unrecoverable.
• Should not influence future business decisions.
• Example: Failed product development costs should be ignored moving forward.

Conclusion

• Economics provides a broad framework for business decision-making.
• Real business experience is necessary for detailed understanding.
• Encouragement to learn more through entrepreneurship and further study.
• Support for Crash Course through Patreon to keep it free for all.

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• Closing note: Economics helps identify rational decisions amidst everyday irrational behaviors.