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accounting profit
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The total revenue a business receives, less its explicit financial costs; Accounting profit = Total revenue − Explicit financial costs.
-The opportunity cost of running a business includes forgone wages (from another job) and interest (by investing somewhere else).
-The opportunity cost of running a business includes forgone wages (from another job) and interest (by investing somewhere else).
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economic profit
answer
The total revenue a firm receives, less both explicit financial costs and the entrepreneur's implicit opportunity costs; Economic profit = Total revenue − Explicit financial costs − Entrepreneur's implicit opportunity costs.
-Economic profits account for both explicit financial costs and implicit opportunity costs.
-Economic profits determine whether it's worth starting a business.
-Economic profits account for both explicit financial costs and implicit opportunity costs.
-Economic profits determine whether it's worth starting a business.
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average revenue
answer
Revenue per unit, calculated as total revenue divided by the quantity supplied. Average revenue is equal to the price, if you charge everyone the same price.
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average cost
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Cost per unit, calculated as your firm's total costs (including fixed and variable costs) divided by the quantity produced.
avg cost = (fixed costs / FC quantity) + (variable costs / VC quantity)
avg cost = (fixed costs / FC quantity) + (variable costs / VC quantity)
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profit margin
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Profits per unit sold; Profit margin = Average revenue − Average cost.
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short run
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The horizon over which the production capacity, and the number and type of competitors you face, cannot change.
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long run
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The horizon over which you, or your rivals, may expand or contract production capacity, and new rivals may enter the market or existing firms may exit.
-economic profits tend towards zero in the long run
-economic profits tend towards zero in the long run
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rational rule for entry
answer
You should enter a market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost.
-new competitors enter profitable markets and make that market less profitable
-new competitors enter profitable markets and make that market less profitable
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rational rule for exit
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Exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs.
-exiting competitors make markets more profitable
-exiting competitors make markets more profitable
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free entry
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When there are no factors making it particularly difficult or costly for a business to enter or exit an industry.
-Free entry pushes economic profits down to zero, in the long run.
-desirable opportunities tend to disappear
-pushes price down towards average cost
-Free entry pushes economic profits down to zero, in the long run.
-desirable opportunities tend to disappear
-pushes price down towards average cost
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free exit
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ensures industries won't remain unprofitable in the long run.
-pushes price up towards average cost
-pushes price up towards average cost
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long run with free entry/exit
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price = average cost
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explicit costs
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out of pocket costs
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implicit costs
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any cost that has already occurred but not necessarily shown or reported as a separate expense
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economies of scale
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situation where, as the quantity of output goes up, the cost per unit goes down
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long run average cost curve
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The long-run average cost curve shows the cost of producing each quantity in the long run, when the firm can choose its level of fixed costs and thus choose which short-run average costs it desires.
-least expensive average cost curve for any level of output
-least expensive average cost curve for any level of output
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short run average cost curve
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falls in the beginning, reaches a minimum and then begins to rise. The reasons for the average cost to fall in the beginning of production are that the fixed factors of a firm remain the same
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constant returns to scale
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allowing all inputs to expand does not much change the average cost of production
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diseconomies of scale
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a situation where, as the level of output and the scale rises, average costs rise as well
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leviathan effect
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can hit firms that become too large to run efficiently, across the entirety of the enterprise
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perfect competition
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firms have this when the following conditions occur: (1) many firms produce identical products; (2) many buyers are available to buy the product, and many sellers are available to sell the product; (3) sellers and buyers have all relevant information to make rational decisions about the product being bought and sold; and (4) firms can enter and leave the market without any restrictions—in other words, there is free entry and exit into and out of the market.
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perfectly competitive firm/price taker
answer
the pressure of competing firms forces them to accept the prevailing equilibrium price in the market
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the shutdown point
answer
The intersection of the average variable cost curve and the marginal cost curve, which shows the price where the firm would lack enough revenue to cover its variable costs
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