Efficiency, Exchange, and the Invisible Hand in Action (Chapter 7)

Efficient

(Pareto efficient) a situation is efficient if no change is possible that will help some people without harming others

Economic profit

=Total revenue - explicit costs - implicit 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 and its explicit costs

Economic profit is the difference between

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

Normal profit =

Accounting profit - economic profit

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

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

Economic loss

An economic profit that is less than zero

Barrier to entry

Any force that prevents firms from entering a new market

Allocative function of price

Changes in price direct resources away from overcrowded markets and toward markets that are undeserved

Rationing function of price

Changes in price distribute scare goods to those consumers who value them most highly

In general, price subsidies will ______ total economic surplus

Decrease

The allocative function of price is to

Direct resources away from overcrowded markets towards markets that are undeserved

If it's not possible to find a transaction that will make some people better off without harming others, then the market equilibrium is

Efficient

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

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

Exit from; rise

If a firm is earning a negative economic profit, then in the long run the firm should

Exit the market

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

Explicit costs

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

If the market equilibrium is efficient, then

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

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

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

New firms to enter the market

Normal profit

Opportunity cost of resources supplied by owners of firm

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

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 a factor of production that is greater than the owner's reservation price is called economic ______

Rent

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

Explicit Costs

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

Accounting Profit

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

Economic profit (or excess profit)

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

The market equilibrium is only efficient if

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

Normal profit

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

A firm's implicit costs are

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

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

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

The theory of the invisible hand

Economic efficiency is important because when markets are efficient

There are more resources available to achieve all our other goals

Accounting profit=

Total revenue - explicit costs

The Equilibrium Principle states that

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

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