chapter 15: entry, exit, and long run profitability

Accounting profit

total revenue - explicit financial costs

Average cost

cost per unit (firms total costs /quantity produced)

Average revenue

revenue per unit (total revenue/ quantity supplied), equal to the price if you charge everyone the same price

Barriers to entry

obstacles that make it difficult for new firms to enter a market

Economic profit

total revenue - explicit financial costs - implicit opportunity costs

Free entry

when there are no factors making it particularly difficult or costly for a business to enter or exit an industry

Long run

horizon over which you or your rivals may expand or contract production capacity and new rival smay enter the market or existing firms may exit

Profit margin

profits per unit sold, average revenue - average cost

rational rule for entry

you should enter a market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost

Rational rule for exit

exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs

Short run

horizon over which the production capacity and the number and type of competitors you face cannot change

Switching costs

any impediment that makes it costly for customers to switch to buying from another business