Economics: Profit Types, Market Structures, and Competition Policies

What is accounting profit?

Total Revenue minus explicit financial costs.

What is economic profit?

Total Revenue minus explicit financial costs and implicit opportunity costs.

How do you calculate accounting profit if total revenue is $500,000 and expenses are $400,000?

Accounting profit = $500,000 - $400,000 = $100,000.

What are opportunity costs?

The costs of the next best alternative that is forgone.

What is the formula for calculating implicit opportunity costs?

Implicit opportunity cost = forgone wages + forgone interest.

If you quit a job earning $60,000 and invest $100,000 at 5% interest, what is the total implicit opportunity cost?

$60,000 + (5% of $100,000) = $65,000.

What is the economic profit if total revenue is $500,000, explicit costs are $400,000, and implicit costs are $65,000?

Economic profit = $500,000 - $400,000 - $65,000 = $35,000.

What does average revenue equal in a firm?

Average revenue equals price.

What is the relationship between average cost and total costs?

Average cost = Total costs divided by quantity (Q).

What happens to average cost when variable costs per unit increase?

Average cost increases due to higher variable costs per unit.

What is the rational rule for entry into a market?

Enter a new market if you expect to earn a positive economic profit, which occurs when price exceeds average cost.

What is the rational rule for exit from a market?

Exit a market if you expect to earn a negative economic profit, which occurs when price is less than average costs.

What are barriers to entry?

Obstacles that make it difficult or costly for a business to enter an industry.

What is a natural monopoly?

A market where a single business can service the whole market at a lower cost than multiple businesses.

What is market power?

The extent to which a seller can charge a higher price without losing many sales to competitors.

What characterizes perfect competition?

Many competitors selling identical products, with no market power.

What is monopolistic competition?

A market structure with many businesses selling somewhat differentiated products.

What defines an oligopoly?

A market structure with a handful of large sellers whose choices depend on rivals' responses.

What is a monopoly?

A market structure with only one seller and no direct competitors.

What is the discount effect in relation to marginal revenue?

The need to cut the price to sell one more item, causing marginal revenue to decline sharply.

What is the relationship between marginal revenue and marginal cost in profit maximization?

Choose quantity (Q) by selling until marginal revenue (MR) equals marginal cost (MC).

What is competition policy?

Policies designed to ensure markets remain competitive, also known as antitrust policy.