Chapter 7

Normal profit

accounting profit minus economic profit

In the case of either a positive or negative externality, a goods market price will:

the market price will send an inaccurate signal of true cost or benefit.

Implicit costs

the opportunity costs of the resources supplied by the firm's owners

A firm that adopts a new cost-saving innovation will earn an economic profit in

the short run

Economist believe

there are important social goals beside economic effiency

If the market for calculators is in a long run equilibrium, and the demand for calculators increases, then we would expect:

-the price of calculators to rise in the short run -firms to earn an economic profit in the short run

The fact that one person's use of an antibiotic reduces the spread of their illness to others suggest that antibiotics entail an EXTERNAL BENEFIT and the fact that one person's use of an antibiotic can make antibiotics less effective at treating other people (because bacterial develop resistance to antibiotics) suggests that antibiotic entail

an external cost

The more inelastic demand is, the _____ burden of the tax borne by ______

larger; consumers

Vaccinations are typically thought to entail an EXTERNAL BENEFIT. As a result, private markets are likely to provide _______ the socially optimal quantity of vaccinations

less than

Cigarettes are typically thought to entail an EXTERNAL COST, as a result, private markets are likely to provide _____ the socially optimal quantity of vaccinations

more than

Price floors result in

quantity supplied exceeding quantity demanded

If a per unit tax is impose, the more elastic demand is, the

smaller the deadweight loss

Price controls are often designed to help the poor, but the fact that they reduce total economic surplus means that alternative policies such as direct income transfer to the poor:

could make everyone better off

Positive economic profit

creates an incentive for new firms to enter the market, leading to economic profit to fall

if a firm earns an economic loss, then its economic profit is

negative

If all firms in a market are identical and th equilibrium price in the market equals the minimum of each firm's average total cost curve, then we would expect

neither entry or exit from the market

When the market is in equilibrium, there are ______ opportunities for gain availbe to individuals

no further

The broader interest of soceity are _______ promoted by the individual pursuit of self-interest

not always

When the costs and benefits to individual participants in the market differ from those expierence by soceity as a whole,

the market equilibrium will not be socially optimal

IF the production of a good generates a positive externality, then

there will be a deadweight loss at market equilibrium quantity

Economic profit equals

total revenue minus explicit and implicit costs

The Equilibrium Principle states

when the market is in equilibrium, there are no further opportunities for gain available to individuals

If the market equilibrium is efficient, then:

-Economic surplus is maximized, enabling society easily achieve its goal -it's not possible to find a transaction that will make some people better off without harming others

If the market for soccer balls is in the long run equilibrium, and the demand for soccer balls falls, then we would expect:

-firms to exit the market in the long run -the price of soccer balls to fall in the short run

The market equilibrium is only efficient if

-the market is perfectly competitive -the market demand curve captures all of the relevant benefits of buying another unit of the good -the market supply curve all of the relevant costs of buyer another unit of the good

In the long run, new firms will enter a market if existing firms are earning a

Positive economic profit

Explicit costs

The actual payments a firm makes to its factors of production and other suppliers.

Normal profit equals

Total Revenue minus opportunity costs

The existence of a negative externality will result in

a greater than optimal level of production

The fact that firms enter industries in response to positive economic profit and leave industries in response to economic loss illustrates the

allocative function of price

If the price of a product is below the equilibrium price, then it's _____ possible to design a transcation that will make both the buyer and seller better off

always

Allocative function of price

changes in prices direct resources away from overcrowded markets and toward markets that are underserved

In general, price subsidies will ______ total economic surplus

decrease

The rationing function of price is to

distrubute scarce goods to those consumers who value them the most highly

If the firms in a market are earning an economic loss, then in the long run there will be______ the market, leading the equilibrium price to ________

exit from; rise

If a firm is earning negative economic profits, it ishould

exit the market

If a firm is earning a positive economic profit, then over time we would expect that firm's profit to

fall as new firms enter the market

One reason that firms have a strong incentive to develop cost-saving innovations is that these innovations enable the firm to earn an economic profit

in the short run

Adam Smith's theory of the invisible hand states that the actions of independent self-interested buyers and sellers will _____ result in the most efficient allocation of resources

often

Except in the extreme cases of perfectly inelastic or elastic demand and/or supply curves, the burden of a per unit tax imposed on sellers falls

partially on the consumer and partially on the producer.

Economic rent

that part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor

If firms are not free to enter or exit a market, then

the allocative function of price cannot operate

If a firm is earning zero economic profits

the firm's accounting profit is equal to the firm's implicit costs

In the long run, all firms in an industry will tend to earn

zero economic profit

In the long run, in a market in which firms are earning an economic loss, exit will occur until all firms earn

zero economic profit