Profit or normal profit is a component of costs and not a component of business profit at all. It represents the opportunity cost, as the time that the owner spends running the firm could be spent on running a different firm. In other words, the cost of normal profit varies both within and across industries, it is commensurate with the associated with each type of investment. Only normal profits arise in circumstances of perfect competition when long-run economic equilibrium is reached, the same is likewise true of the long run equilibria of monopolistically competitive industries and, more generally, any market which is held to be contestable. Normally, a firm that introduces a differentiated product can initially secure a temporary power for a short while. At this stage, the price the consumer must pay for the product is high. When this finally occurs, all monopoly associated with producing and selling the product disappears. Profit can, occur in competitive and contestable markets in the short run, economic profit is, much more prevalent in uncompetitive markets such as in a perfect monopoly or oligopoly situation.
This allows the firm to set a price which is higher than that which would be found in a similar but more competitive industry, allowing them economic profit in both the long and short run. In a single-goods case, an economic profit happens when the firms average cost is less than the price of the product or service at the profit-maximizing output. The economic profit is equal to the quantity of output multiplied by the difference between the average cost and the price, governments will try to intervene in uncompetitive markets to make them more competitive. Antitrust or competition laws were created to prevent powerful firms from using their power to artificially create the barriers to entry they need to protect their economic profits. This includes the use of predatory pricing toward smaller competitors, with lower barriers, new firms can enter the market again, making the long run equilibrium much more like that of a competitive industry, with no economic profit for firms. For example, the old AT&T monopoly, which existed before the courts ordered its breakup, had to get government approval to raise its prices.
Though a regulated firm will not have a profit as large as it would in an unregulated situation. The social profit from a firms activities is the normal profit plus or minus any externalities or consumer surpluses that occur in its activity, a firm may report relatively large monetary profits, but by creating negative externalities their social profit could be relatively small. Profitability is a term of economic efficiency, mathematically it is a relative index – a fraction with profit as numerator and generating profit flows or assets as denominator. It is a standard economic assumption that, other things being equal, given that profit is defined as the difference in total revenue and total cost, a firm achieves a maximum by operating at the point where the difference between the two is at its greatest
One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations and it analyzes market failure, where markets fail to produce efficient results. Microeconomics deals with the effects of economic policies on the aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon microfoundations—i. e, based upon basic assumptions about micro-level behavior. Microeconomic theory typically begins with the study of a single rational, to economists, rationality means an individual possesses stable preferences that are both complete and transitive. The technical assumption that preference relations are continuous is needed to ensure the existence of a utility function, microeconomic theory progresses by defining a competitive budget set which is a subset of the consumption set.
It is at point that economists make the technical assumption that preferences are locally non-satiated. Without the assumption of LNS there is no guarantee that an individual would maximize utility. With the necessary tools and assumptions in place the utility maximization problem is developed, the utility maximization problem is the heart of consumer theory. The utility maximization problem attempts to explain the action axiom by imposing rationality axioms on consumer preferences, the utility maximization problem serves not only as the mathematical foundation of consumer theory but as a metaphysical explanation of it as well. That is, the utility maximization problem is used by economists to not only explain what or how individuals make choices, the utility maximization problem is a constrained optimization problem in which an individual seeks to maximize utility subject to a budget constraint. Economists use the extreme value theorem to guarantee that a solution to the utility maximization problem exists and that is, since the budget constraint is both bounded and closed, a solution to the utility maximization problem exists.
Economists call the solution to the utility maximization problem a Walrasian demand function or correspondence, the utility maximization problem has so far been developed by taking consumer tastes as the primitive. However, a way to develop microeconomic theory is by taking consumer choice as the primitive. This model of microeconomic theory is referred to as Revealed preference theory, the theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices, quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the works well in situations meeting these assumptions
Mathematical economics is the application of mathematical methods to represent theories and analyze problems in economics. An advantage claimed for the approach is its allowing formulation of theoretical relationships with rigor, Mathematics allows economists to form meaningful, testable propositions about wide-ranging and complex subjects which could less easily be expressed informally. Further, the language of mathematics allows economists to make specific, much of economic theory is currently presented in terms of mathematical economic models, a set of stylized and simplified mathematical relationships asserted to clarify assumptions and implications. This rapid systematizing of economics alarmed critics of the discipline as well as some noted economists, the use of mathematics in the service of social and economic analysis dates back to the 17th century. Then, mainly in German universities, a style of instruction emerged which dealt specifically with detailed presentation of data as it related to public administration, gottfried Achenwall lectured in this fashion, coining the term statistics.
At the same time, a group of professors in England established a method of reasoning by figures upon things relating to government. Pettys use of detailed numerical data would influence statisticians and economists for some time, the mathematization of economics began in earnest in the 19th century. Most of the analysis of the time was what would be called classical economics. Subjects were discussed and dispensed with through algebraic means, but calculus was not used, more importantly, until Johann Heinrich von Thünens The Isolated State in 1826, economists did not develop explicit and abstract models for behavior in order to apply the tools of mathematics. Thünens model of farmland use represents the first example of marginal analysis, Thünens work was largely theoretical, but he mined empirical data in order to attempt to support his generalizations. In comparison to his contemporaries, Thünen built economic models and tools and these included W. S. Jevons who presented paper on a general mathematical theory of political economy in 1862, providing an outline for use of the theory of marginal utility in political economy.
In 1871, he published The Principles of Political Economy, declaring that the subject as science must be simply because it deals with quantities. Jevons expected the only collection of statistics for price and quantities would permit the subject as presented to become an exact science, others preceded and followed in expanding mathematical representations of economic problems. At the time, it was thought that utility was quantifiable, Cournot and Francis Ysidro Edgeworth are considered the precursors to modern mathematical economics. Cournot, a professor of mathematics, developed a treatment in 1838 for duopoly—a market condition defined by competition between two sellers. This treatment of competition, first published in Researches into the Mathematical Principles of Wealth, is referred to as Cournot duopoly and it is assumed that both sellers had equal access to the market and could produce their goods without cost. Further, it assumed that both goods were homogeneous, each seller would vary her output based on the output of the other and the market price would be determined by the total quantity supplied.
The profit for each firm would be determined by multiplying their output, Cournots contributions to the mathematization of economics would be neglected for decades, but eventually influenced many of the marginalists
In economics and other social sciences, preference is the ordering of alternatives based on their relative utility, a process which results in an optimal choice. The character of the preferences is determined purely by taste factors, independent of considerations of prices, income. With the help of the scientific method many practical decisions of life can be modelled, in 1926 Ragnar Frisch developed for the first time a mathematical model of preferences in the context of economic demand and utility functions. Up to then, economists had developed a theory of demand that omitted primitive characteristics of people. This omission ceased when, at the end of the 19th, because binary choices are directly observable, it instantly appealed to economists. The search for observables in microeconomics is taken further by revealed preference theory. Since the pioneer efforts of Frisch in the 1920s, one of the issues which has pervaded the theory of preferences is the representability of a preference structure with a real-valued function.
This has been achieved by mapping it to the mathematical index called utility, von Neumann and Morgenstern 1944 book Games and Economic Behaviour treated preferences as a formal relation whose properties can be stated axiomatically. Even though the economics of choice can be examined either at the level of utility functions or at the level of preferences, suppose the set of all states of the world is X and an agent has a preference relation on X. It is common to mark the weak preference relation by ⪯, the symbol ∼ is used as a shorthand to the indifference relation, x ∼ y ⟺, which reads the agent is indifferent between y and x. The symbol ≺ is used as a shorthand to the preference relation, x ≺ y ⟺. In everyday speech, the statement x is preferred to y is generally understood to mean that someone chooses x over y, decision theory rests on more precise definitions of preferences given that there are many experimental conditions influencing peoples choices in many directions. Suppose a person is confronted with an experiment that she must solve with the aid of introspection.
She is offered apples and oranges, and is asked to choose one of the two. A decision scientist observing this event would be inclined to say that whichever is chosen is the preferred alternative. Under several repetitions of experiment, if the scientist observes that apples are chosen 51% of the time it would mean that x ≻ y. If half of the oranges are chosen, x ∼ y. Finally, if 51% of the time she chooses oranges it means that y ≻ x, preference is here being identified with a greater frequency of choice
Social cost in economics may be distinguished from private cost. Economic theorists model individual decision-making as measurement of costs and benefits, Social cost is considered to be the private cost plus externalities. Rational choice theory often assumes that individuals consider only the costs they themselves bear when making decisions, with pure private costs, the costs carried by the individuals involved are the only economically meaningful costs. The choice to purchase a glass of lemonade at a stand has little consequence for anyone other than the seller or the buyer. If there is an externality, social costs will be greater than private costs. Environmental pollution is an example of a social cost that is seldom borne completely by the polluter, if there is a positive externality, one will have higher social benefits than private benefits. In either case, economists refer to this as market failure because resources will be allocated inefficiently, in the case of negative externalities, private agents will engage in too much of the activity, in the case of positive externalities, they will engage in too little.
The ideas of social cost and market failure are often used as an argument for government intervention in the form of regulations and they prefer to rely on tradition, community pressure, and dollar voting. Negative externalities lead to an over-production of those goods that have a social cost. As a result, individual entities in the marketplace have no incentive to factor in these externalities, more of this activity is performed than would be if its cost had a true accounting. This can be illustrated with a diagram, profit-maximizing organizations will set output at Qp where marginal private costs is equal to marginal revenue. This will yield a profit shown by the triangular area 0, C, F, but if externalities are present, the attainment of social optimality requires that the full social costs must be considered. The socially optimum level of output is Qs where marginal social costs or referred to as the Marginal Social Damage is equal to marginal revenue, the amount of output, Qp minus Qs, indicates the excess output due to the externality.
Profits will decrease also, from 0, C, F to 0, A, F and it is clearly profitable for the firm to pollute, since internalizing the externality hurts profits. The amount of the externality will decrease from C, D to B, A, because the marginal social cost curve is above the marginal private cost curve, this diagram illustrates the case of a negative externality. Kapp proposes to prevent damages ex ante via precautionary regulations that reflect socially determined safety standards, Social Costs Today - Institutional Analyses of the Present Crisis, edited by Paolo Ramazzotti, Pietro Frigato and Wolfram Elsner, Routledge. Social Costs and Public Action in Modern Capitalism, edited by Wolfram Elsner, Pietro Frigato and Paolo Ramazzotti, Routledge
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors, in economics, a monopoly is a single seller. In law, a monopoly is an entity that has significant market power, that is. Although monopolies may be big businesses, size is not a characteristic of a monopoly, a small business may still have the power to raise prices in a small industry. A monopoly is distinguished from a monopsony, in there is only one buyer of a product or service. Likewise, a monopoly should be distinguished from a cartel, in which several providers act together to coordinate services, prices or sale of goods. Monopolies and oligopolies are all situations in one or a few entities have market power and therefore interact with their customers. Monopolies can be established by a government, form naturally, or form by integration, in many jurisdictions, competition laws restrict monopolies. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, patents and trademarks are sometimes used as examples of government-granted monopolies.
The government may reserve the venture for itself, thus forming a government monopoly, There are four basic types of market structures in traditional economic analysis, perfect competition, monopolistic competition and monopoly. A monopoly is a structure in which a single supplier produces, if there is a single seller in a certain market and there are no close substitutes for the product, the market structure is that of a pure monopoly. Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced and this is termed monopolistic competition, whereas in oligopoly the companies interact strategically. Most economic textbooks follow the practice of explaining the perfect competition model. The boundaries of what constitutes a market and what does not are relevant distinctions to make in economic analysis, in a general equilibrium context, a good is a specific concept including geographical and time-related characteristics. Most studies of market structure relax a little their definition of a good, price Maker, Decides the price of the good or product to be sold, but does so by determining the quantity in order to demand the price desired by the firm.
High Barriers, Other sellers are unable to enter the market of the monopoly, single seller, In a monopoly, there is one seller of the good, who produces all the output. Therefore, the market is being served by a single company, and for practical purposes. Price Discrimination, A monopolist can change the price or quantity of the product and he or she sells higher quantities at a lower price in a very elastic market, and sells lower quantities at a higher price in a less elastic market
Merriam-Webster defines competition in business as the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms. Later microeconomic theory distinguished between perfect competition and imperfect competition, concluding that perfect competition is Pareto efficient while imperfect competition is not. Competition, according to the theory, causes commercial firms to develop new products and technologies, the greater selection typically causes lower prices for the products, compared to what the price would be if there was no competition or little competition. Competition is generally accepted as a condition for the coordination of disparate individuals interests via the market process. It is generally accepted that competition results in lower prices and a number of goods delivered to more people. Less competition is perceived to result in higher prices with a fewer number of—and less innovation in—goods delivered to fewer people, as a result, many governments use competition laws to promote competition and regulate against anti-competitive practices.
Competition is seen as a state which produces gains for the whole economy, competition is widespread throughout the market process. It is a condition where buyers tend to compete with other buyers, in offering goods for exchange, buyers competitively bid to purchase specific quantities of specific goods which are available, or might be available if sellers were to choose to offer such goods. Similarly, sellers bid against other sellers in offering goods on the market, competing for the attention, competition results from scarcity—there is never enough to satisfy all conceivable human wants—and occurs when people strive to meet the criteria that are being used to determine who gets what. For the competitive process to work however, it is important that prices accurately signal costs and benefits, where externalities occur, or monopolistic or oligopolistic conditions persist, or for the provision of certain goods such as public goods, the pressure of the competitive process is reduced. Competition may lead to wasted effort and to increased costs in some circumstances, in a small number of goods and services, the cost structure means that competition may be inefficient.
These situations are known as natural monopoly and are usually publicly provided or tightly regulated, competition does not necessarily have to be between companies. For example, business writers sometimes refer to internal competition, the idea was first introduced by Alfred Sloan at General Motors in the 1920s. Sloan deliberately created areas of overlap between divisions of the company so that division would be competing with the other divisions. For example, the Chevy division would compete with the Pontiac division for some market segments, also, in 1931, Procter & Gamble initiated a deliberate system of internal brand versus brand rivalry. The company was organized around different brands, with each brand allocated resources, each brand manager was given responsibility for the success or failure of the brand and was compensated accordingly. This form of competition thus pitted a brand against another brand, most businesses encourage competition between individual employees. An example of this is a contest between sales representatives, the sales representative with the highest sales over a period of time would gain benefits from the employer
Econometrics is the application of statistical methods to economic data and is described as the branch of economics that aims to give empirical content to economic relations. More precisely, it is the analysis of actual economic phenomena based on the concurrent development of theory and observation. An introductory economics textbook describes econometrics as allowing economists to sift through mountains of data to extract simple relationships, the first known use of the term econometrics was by Polish economist Paweł Ciompa in 1910. Ragnar Frisch is credited with coining the term in the sense in which it is used today, the basic tool for econometrics is the multiple linear regression model. Econometric theory uses statistical theory and mathematical statistics to evaluate and develop econometric methods, econometricians try to find estimators that have desirable statistical properties including unbiasedness and consistency. Applied econometrics uses theoretical econometrics and real-world data for assessing economic theories, developing models, analyzing economic history.
The basic tool for econometrics is the linear regression model. In modern econometrics, other tools are frequently used. Estimating a linear regression on two variables can be visualized as fitting a line through points representing paired values of the independent and dependent variables. For example, consider Okuns law, which relates GDP growth to the unemployment rate, the unknown parameters β0 and β1 can be estimated. Here β1 is estimated to be −1.77 and β0 is estimated to be 0.83 and this means that if GDP growth increased by one percentage point, the unemployment rate would be predicted to drop by 1.77 points. The model could be tested for statistical significance as to whether an increase in growth is associated with a decrease in the unemployment, as hypothesized. If the estimate of β1 were not significantly different from 0, the variance in a prediction of the dependent variable as a function of the independent variable is given in polynomial least squares. Econometric theory uses statistical theory and mathematical statistics to evaluate and develop econometric methods, econometricians try to find estimators that have desirable statistical properties including unbiasedness and consistency.
Ordinary least squares is used for estimation since it provides the BLUE or best linear unbiased estimator given the Gauss-Markov assumptions. Estimators that incorporate prior beliefs are advocated by those who favor Bayesian statistics over traditional, classical or frequentist approaches, applied econometrics uses theoretical econometrics and real-world data for assessing economic theories, developing econometric models, analyzing economic history, and forecasting. Econometrics may use standard statistical models to study economic questions, but most often they are with observational data, rather than in controlled experiments. In this, the design of studies in econometrics is similar to the design of studies in other observational disciplines, such as astronomy, sociology
The concept is named after Vilfredo Pareto, Italian engineer and economist, who used the concept in his studies of economic efficiency and income distribution. The concept has applications in fields such as economics, engineering. The Pareto frontier is the set of all Pareto efficient allocations, an allocation is defined as Pareto efficient or Pareto optimal when no further Pareto improvements can be made. The notion of Pareto efficiency can be applied to the selection of alternatives in engineering, each option is first assessed under multiple criteria and a subset of options is identified with the property that no other option can categorically outperform any of its members. Pareto optimality is a defined concept used to determine when an allocation is optimal. If there is a transfer that satisfies this condition, the reallocation is called a Pareto improvement, when no further Pareto improvements are possible, the allocation is a Pareto optimum. A formal definition for an economy is as follows, Consider an economy with i agents and j goods.
Here in this economy, feasibility refers to an allocation where the total amount of each good that is allocated sums to no more than the total amount of the good in the economy. It is important to note that a change from a generally inefficient economic allocation to an efficient one is not necessarily a Pareto improvement, even if there are overall gains in the economy, if a single agent is disadvantaged by the reallocation, the allocation is not Pareto optimal. For instance, if a change in economic policy eliminates a monopoly and that subsequently becomes competitive. However, since the monopolist is disadvantaged, this is not a Pareto improvement, thus, in practice, to ensure that nobody is disadvantaged by a change aimed at achieving Pareto efficiency, compensation of one or more parties may be required. However, in the world, such compensations may have unintended consequences. They can lead to incentive distortions over time as agents anticipate such compensations, under certain idealized conditions, it can be shown that a system of free markets, called a competitive equilibrium, will lead to a Pareto efficient outcome.
This is called the first welfare theorem and it was first demonstrated mathematically by economists Kenneth Arrow and Gérard Debreu. However, the result only holds under the assumptions necessary for the proof. In the absence of information or complete markets, outcomes will generally be Pareto inefficient. In addition to the first welfare theorem linking the concepts of Pareto optimal allocations and free markets, the second welfare theorem is essentially the reverse of the first welfare theorem. It states that under similar ideal assumptions, any Pareto optimum can be obtained by some competitive equilibrium, or free market system, a weak Pareto optimum is an allocation for which there are no possible alternative allocations whose realization would cause every individual to gain
In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, the consumer has no preference for one combination or bundle of goods over a different combination on the same curve, one can refer to each point on the indifference curve as rendering the same level of utility for the consumer. In other words, a curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is a device to represent preferences rather than something from which preferences come, the main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles. There are infinitely many curves, one passes through each combination. A collection of curves, illustrated graphically, is referred to as an indifference map. The theory can be derived from William Stanley Jevons ordinal utility theory, a graph of indifference curves for several utility levels of an individual consumer is called an indifference map.
Points yielding different utility levels are associated with distinct indifference curves. Each point on the curve represents the same elevation, If you move off an indifference curve traveling in a northeast direction you are essentially climbing a mound of utility. The higher you go the greater the level of utility, the non-satiation requirement means that you will never reach the top, or a bliss point, a consumption bundle that is preferred to all others. Indifference curves are typically represented to be, Defined only in the quadrant of commodity quantities. That is, as quantity consumed of one increases, total satisfaction would increase if not offset by a decrease in the quantity consumed of the other good. Equivalently, such that more of good is equally preferred to no increase, is excluded. So, with, no two curves can intersect, transitive with respect to points on distinct indifference curves. That is, if each point on I2 is preferred to each point on I1, convex preferences imply that the indifference curves cannot be concave to the origin, i. e. they will either be straight lines or bulge toward the origin of the indifference curve.
If the latter is the case, as a consumer decreases consumption of one good in successive units, the consumer has ranked all available alternative combinations of commodities in terms of the satisfaction they provide him. Assume that there are two consumption bundles A and B each containing two commodities x and y, if A I B and B I C, A I C. Preferences are continuous If A is preferred to B and C is sufficiently close to B A is preferred to C, continuous means infinitely divisible - just like there are infinitely many numbers between 1 and 2 all bundles are infinitely divisible
These choices are influenced by the relative value people assign to two or more payoffs at different points in time. Most choices require decision-makers to trade off costs and benefits at different points in time and these decisions may be about savings, work effort, nutrition, health care and so forth. Discounted utility has been used to describe how people actually make intertemporal choices, policy decisions about how much to spend on research and development and education all depend on the discount rate used to analyze the decision. The Keynesian consumption function was based on two major hypotheses, marginal propensity to consume lies between 0 and 1. Secondly, average propensity to consume falls as income rises, early empirical studies were consistent with these hypotheses. However, after World War II it was observed that savings did not rise as incomes rose, the Keynesian model therefore failed to explain the consumption phenomenon and thus emerged the theory of intertemporal choice.
Intertemporal choice was introduced by John Rae in 1834 in the Sociological Theory of Capital, Eugen von Böhm-Bawerk in 1889 and Irving Fisher in 1930 elaborated on the model. A few other models based on intertemporal choice include the Life Cycle Income Hypothesis proposed by Franco Modigliani, the concept of Walrasian Equilibrium may be extended to incorporate intertemporal choice. The Walrasian analysis of such an equilibrium introduces two new concepts of prices, futures prices and spot prices, Irving Fisher developed the theory of intertemporal choice in his book Theory of interest. According to Fisher, an individuals impatience depends on four characteristics of his income stream, the size, the time shape, the composition and risk. Besides this, self-control, expectation of life, in order to understand the choice exercised by a consumer across different periods of time we take consumption in one period as a composite commodity. Suppose there is one consumer, N commodities, and two periods, preferences are given by U where x t =.
Income in period t is Y t, savings in period 1 is S1, spending in period t is C t, and r is the interest rate. If the person is unable to borrow against future income in the first period, he is subject to budget constraints in each period. On the other hand, if such borrowing is possible the person is subject to a single budget constraint. The left hand shows the present value of expenditure and right hand side depicts the present value of income. Multiplying the equation by would give us the future values. Now the consumer has to choose a C1 and C2 so as to Maximize U subject to C1 + C2 / = Y1 + Y2 /, a consumer may be a net saver or a net borrower
In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are costs that may be incurred or changed if an action is taken. Both retrospective and prospective costs may be fixed or variable costs. However, many consider it a mistake to classify sunk costs as fixed or variable. For example, if a firm sinks $400 million on a software installation. A fixed cost would be monthly payments made as part of a contract or licensing deal with the company that set up the software. The upfront irretrievable payment for the installation should not be deemed a fixed cost, Sunk costs should be kept separate. The variable costs for this project might include data centre power usage, in traditional microeconomic theory, only prospective costs are relevant to an investment decision. Traditional economics proposes that economic actors should not let sunk costs influence their decisions, doing so would not be rationally assessing a decision exclusively on its own merits.
Alternatively, a decision-maker might make rational decisions according to their own incentives and this is considered to be an incentive problem and is distinct from a sunk cost problem. Evidence from behavioral economics suggests this theory fails to predict real-world behavior, Sunk costs do, in fact, influence actors decisions because humans are prone to loss aversion and framing effects. In light of such cognitive quirks, it is unsurprising that people fail to behave in ways that economists deem rational. Sunk costs should not affect the rational decision-makers best choice, until a decision-maker irreversibly commits resources, the prospective cost is an avoidable future cost and is properly included in any decision-making processes. For example, if one is considering preordering movie tickets, but has not actually purchased them yet, the sunk cost is distinct from economic loss. For example, when a new car is purchased, it can subsequently be resold, the economic loss is the difference.
It may be used as shorthand for an error in due to the sunk cost fallacy, irrational decision-making or, most simply. Economists argue that sunk costs are not taken into account when making rational decisions, in either case, the ticket-buyer has paid the price of the ticket so that part of the decision no longer affects the future. The economist will suggest that, since the second option involves suffering in one way