Ch 7 - Efficiency, Exchange, and the Invisible Hand in Action

Suppose Michelle owns a women's clothing boutique. Each year, her total revenue is $300,000 and her explicit costs are $160,000. In addition, Michelle estimates that the opportunity cost of the resources she puts into her business is $90,000 per year. What is Michelle's accounting profit?

$140,000 Reason: $300,000 - $160,000 = $140,000

Suppose Valerie owns a hardware store. Each year, her revenue is $600,000 and her explicit costs are $550,000. In addition, Valerie estimates that the opportunity cost of all the resources she puts into her business is $100,000 per year. What is Valerie's accounting profit?

$50,000 per year Reason: $600,000 - $550,000 = $50,000

Suppose Michelle owns a women's clothing boutique. Each year, her total revenue is $300,000 and her explicit costs are $160,000. In addition, Michelle estimates that the opportunity cost of the resources she puts into her business is $90,000 per year. What is Michelle's economic profit?

$50,000 per year Reason: TR - EC - IC

Suppose Valerie owns a hardware store. Each year, her revenue is $600,000 and her explicit costs are $550,000. In addition, Valerie estimates that the opportunity cost of all the resources she puts into her business is $100,000 per year. What is Valerie's economic profit?

-$50,000 per year Reason: $600,000 - $550,000 - $100,000 = -$50,000

Economic profit is also called

Excess profit

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

Explicit costs

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

Negative

Normal Profit is

The opportunity cost of the resources supplied by the firm's owners, equal to accounting profit minus economic profit.

Accounting profit =

Total revenue - explicit costs

Any force that prevents firms from entering a new market is called

a barrier to entry.

Accounting profit is the difference between

a firm's total revenue and its explicit costs.

Any force that prevents firms from entering a new market is called a ___ to entry.

barrier

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 transfers to the poor:

could make everyone better off

In general, price subsidies will _____ total economic surplus.

decrease

The individual pursuit of self-interest _____ with the broader interests of society.

does not always coincide

It's always possible to design a transaction that will help both buyers or sellers whenever the price of a product is

either above or below the equilibrium price.

If the firms in a market are earning a positive economic profit, then in the long run, _____ the market will lead economic profit to _____.

entry into; fall

When the market is _____, there are no further opportunities for gain available to individuals.

in equilibrium

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.

Suppose it's possible to find a transaction that will make some people better off without hurting others. In this case, we know the market equilibrium

is not socially optimal

If the price of a good or service lands above the equilibrium, we can conclude that ______.

it's always possible to design a transaction that will help both buyers or sellers

The market equilibrium is efficient if

it's not possible to find a transaction that will help some people without harming others.

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

neither entry into nor exit from the market.

If all of the firms in a market earn zero economic profit, then we would expect

neither entry into nor exit from the market.

When the market is in equilibrium, there are _____ opportunities for gain available to individuals.

no further

A firm's explicit costs include

the actual payments a firm makes to its factors of production.

A firm's implicit costs are

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.

Economists believe that

there are important social goals besides economic efficiency.

The rationing function of price is to

to distribute scarce goods to those consumers who value them most highly

Economic profit =

total revenue - explicit costs - implicit costs

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

zero economic profit.

Economic loss

An economic profit that is less than zero

If a firm's economic loss is $10,000, then its _____ is -$10,000.

Economic profit

True or false: Economists do not believe that it's important to address poverty and inequality because all that matters is whether the market is efficient.

False

The existence of positive economic profit in the long run creates an incentive for:

New firms to enter the market

The opportunity cost of the resources supplied by a firm's owners is the firm's

Normal profit

Economic profit is the difference between

a firm's total revenue and the sum of its explicit and implicit costs.

Economic rent is the part of the payment for a factor of production that is _____ the owner's reservation price.

above

If the price of a product is below the equilibrium price, then it's ______ possible to design a transaction that will make both buyers and sellers better off.

always

In the long run, economic loss creates an incentive for

existing firms to exit the market.

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

fall as new firms enter the market.

If the government were to subsidize the price of cars, it's likely that total economic surplus would

fall.

The opportunity costs of all the resources supplied by a firm's owners are the firm's

implicit costs

The broader interests of society are _____ promoted by the individual pursuit of self-interest.

not always

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

positive economic profit.

If the price of a product is below the equilibrium price, then it's _____ to design a transaction that will help both buyers and sellers.

possible

The role that prices play in distributing scarce goods to those consumers who value them the most highly is known as the

rationing function of price.

If the total economic surplus from a market is thought of as a pie to be divided among the participants in the market, then imposing price controls will:

reduce the size of the pie

The part of the payment for an input that is above the owner's reservation price is economic ____.

rent