Studied by 3 peopleAccounting 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
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