Chapter 15: Entry, Exit, and Long-Run Profitability Exam 3

This set of flashcards covers the key concepts from Chapter 15 on Entry, Exit, and Long-Run Profitability, focusing on economic and accounting profits, market entry/exit strategies, and the implications of long-run market dynamics.

What are the components that constitute accounting profit?

Total revenue minus explicit financial costs.

How is economic profit defined?

Total revenue minus explicit financial costs and the entrepreneur's implicit opportunity costs.

What should be taken into consideration when deciding to launch a new business?

Opportunity costs, including forgone wages and potential interest from investments.

What is the formula for calculating accounting profit?

Accounting profit = Total revenue - Explicit financial costs.

What is the formula for calculating economic profit?

Economic profit = Total revenue - Explicit financial costs - Implicit opportunity costs.

What influences the shape of the average cost curve?

The spreading of fixed costs and rising variable costs.

What happens when there is an increase in demand due to a reduction in competitors?

The firm's demand curve shifts to the right, resulting in higher prices and quantities sold.

When is it appropriate to exit a market?

If expected economic profits are negative or prices fall below average costs.

What does free entry and exit do to economic profits in the long run?

It pushes economic profits to zero.

What are demand-side strategies aimed at preventing?

They aim to prevent new entrants from winning over existing customers.

What role do regulatory strategies play in market entry?

They establish barriers through licenses, patents, and regulations that control business entry.

How can excess capacity deter new entrants?

It signals readiness to flood the market and combat newcomers effectively.

What key insight can be drawn when economic profit is zero?

Market forces prevent further entry or exit; it's the equilibrium point.

What is the impact of having a good reputation with clients in a competitive market?

It helps lock in customers and create barriers to entry for new competitors.

In the long run, how do average costs affect pricing?

In the long run, price equals average cost, determining profitability.

What can an entrepreneur do to create a cost advantage over competitors?

Leverage experience, mass production, and invest in research and development.

What is the profit margin?

Profit margin = Price - Average Cost.

What does the term 'barriers to entry' refer to in a market context?

Obstacles that prevent new competitors from easily entering the market.