Chapter 15 – Entry, Exit, and Long-Run Profitability

Vocabulary flashcards covering revenue, cost, profit concepts; average revenue and cost measures; entry and exit rules; and short-run versus long-run dynamics from Chapter 15.

Accounting profit

Total revenue minus explicit financial costs; tracks all money that flows in and out of the business and appears on the income statement.

Economic profit

Total revenue minus explicit financial costs and implicit opportunity costs; gauges whether starting or continuing a business is the best use of your resources.

Explicit financial costs

Out-of-pocket payments such as rent, wages, raw materials, and utility bills that leave the business.

Implicit opportunity costs

The value of forgone alternatives, most notably forgone wages and forgone interest, incurred by committing resources to a business.

Forgone wages

The salary and benefits you sacrifice by leaving your next-best job to run a business; an implicit cost.

Forgone interest

The return you give up by investing your own funds in the business rather than in an interest-bearing asset; an implicit cost.

Average revenue

Revenue per unit, calculated as total revenue divided by quantity; equals price when all customers pay the same price.

Firm’s demand curve

Shows the price a firm can charge for each quantity and, because price equals average revenue, doubles as the firm’s average-revenue curve.

Average cost

Cost per unit, found by dividing total costs (fixed plus variable) by quantity produced.

Fixed cost

Expenses that do not vary with output, such as rent or the opportunity cost of the owner’s time and money.

Variable cost

Expenses that change with the level of output, including raw materials, energy use, and hourly labor.

Average fixed cost

Fixed cost per unit; declines as output rises because fixed costs are spread over more units.

Average variable cost

Variable cost per unit; typically rises at higher output levels due to diminishing marginal productivity and other inefficiencies.

Profit margin (per unit)

Price minus average cost (or, equivalently, average revenue minus average cost); positive whenever the demand curve lies above the average-cost curve.

Short run

Time horizon over which production capacity and the number of competing firms are fixed; firms choose quantity but not scale.

Long run

Time horizon over which firms can expand or contract capacity and competitors can enter or exit the market.

Cost-benefit principle (entry/exit)

Enter a market if expected benefits exceed costs; exit if costs exceed benefits, with economic profit measuring the difference.

Rational Rule for Entry

Enter a market when expected price is greater than average cost, yielding positive economic profit.

Rational Rule for Exit

Exit a market when expected price is less than average cost, yielding negative economic profit.

Free entry and exit

The ability of firms to enter profitable markets and leave unprofitable ones, driving long-run economic profits toward zero.

Zero economic profit

Long-run outcome of free entry and exit where price equals average cost and firms earn just enough to cover all explicit and implicit costs.

Market power

A firm’s ability to raise price above marginal cost; decreases when new competitors enter and increases when rivals exit.

Diminishing marginal product

The tendency for additional units of a variable input to add less and less to output, contributing to rising variable costs.