Chapter 7 - Efficiency, exchange & the Invisible hand in action

Accounting profit = Total revenue

Explicit costs

Explicit costs

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

Accounting profit

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

Implicit costs

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

Economic profit = excess profit

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

Normal profit

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

Rationing function of price

changes in prices distribute scarce goods to those consumers who value them most highly

Allocative function of price

changes in prices direct resources away from overcrowded markets and toward markets that are underserved

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

Barrier to entry

any force that prevents firms from entering a new market

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

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

Accounting profit

Difference between a firm's total revenue and its explicit costs

Implicit costs

Opportunity costs of the resources supplied by the firm's owners

Economic profit = excess profit

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

Normal profit

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

Rationing function of price

Changes in prices distribute scarce goods to those consumers who value them most highly

Allocative function of price

Changes in prices direct resources away from overcrowded markets and toward markets that are underserved

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

Barrier to entry

Any force that prevents firms from entering a new market

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

Market in equilibrium

A market in equilibrium is one in which no additional opportunities for gain remain available to individual buyers or sellers

Efficient market or Pareto efficient

A market in equilibrium is said to be efficient (or Pareto efficient), meaning that no
reallocation is possible that will benefit some people without harming others