Chapter 6 Econ

The invisible hand theory

Adam Smith's theory that the actions of independent, self interested buyers and sellers will often result in the most efficient allocation of resources.

Rationing Function of Price

Changes in prices distribute scarce goods to those consumers who value them most highly. At an auction, whoever bids the highest amount gets the thing.

Economic rents

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.

Accounting profit

The difference between a firm's total revenue and its explicit costs.

Economic Profit

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

Economic profits

The difference between what someone is paid (the business owners total revenue) and her reservation price for remaining in business (sum of all her costs, explicit and implicit).

Normal Profit

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

A market equilibrium is only efficient if:

all relevant costs and benefits are reflected in the market supply and demand curves.

The role that prices play in directing resources away from overcrowded markets and towards markets that are underserved is known as the ______ function of price.

allocative

The allocative function of price cannot operate unless there is:

both free entry and free exit.

Accounting profit minus implicit costs equals:

economic profit.

Generally, ______ motivates firms to enter an industry, while ______ motivates firms to exit an industry.

economic profit; economic loss

One difference between the long run and the short run in a perfectly competitive industry is that:

firms necessarily earn zero economic profit in the long run but may earn positive or negative economic profit in the short run.

In a free market economy, the decisions of buyers and sellers are:

guided by prices.

If it is possible to make a change that will help some people without harming others, then the situation is:

inefficient.

The main problem with price subsidies is that they:

lower total economic surplus.

Explicit costs:

measure the payments made to the firm's factors of production.

Adam Smith coined the term "invisible hand" to describe the process by which the actions of independent, self-interested buyers and sellers will:

often lead to the most efficient allocation of resources.

If you were to start your own business, your implicit costs would include the:

opportunity cost of the time you spend working at the business.

The role that prices play in distributing scarce goods and services to those consumers who value them the most highly is known as the ______ function of price.

rationing

Allocative Function of Price

Changes in price direct resources away from overcrowded markets and towards markets that are undeserved. Resources leave markets in which price cannot cover the cost of production and enter those in which price exceeds the cost of production.

Suppose all firms in a perfectly competitive industry are earning an economic profit. One would expect that, over time, the number of firms in the industry will ______ and the market price will ______.

rise; fall

If the market supply curve does not capture all of the costs to society of producing an additional unit of good, then:

the market equilibrium will not be efficient.

In a perfectly competitive market, if supply and demand fully reflect all of the costs and benefits associated with production and consumption, then total economic surplus is maximized when:

the market is in equilibrium.

If there is excess demand in a market, then this suggests that:

there is an opportunity for mutually beneficial trades.

Economic profit is equal to:

total revenue minus the sum of explicit and implicit costs.

The fact that price subsidies reduce economic surplus implies that:

we can find an alternative policy that will make both the rich and the poor better off.