Accounting profit = Total revenue - Explicit costs
Economic profit = Total revenue - Explicit costs - Implicit costs
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.
A market in equilibrium is one in which no additional opportunities for gain remain available to individual buyers or sellers.
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.
When a market is not in equilibrium (because price is either above the equilibrium level or below it) the quantity exchanged is always less than the equilibrium level. At a such a quantity, a transaction can always be made in which both buyer and seller benefit from the exchange of an additional unit of output.
Total economic surplus in a market is maximized when exchange occurs at the equilibrium price. But the fact that equilibrium is "efficient" in this sense does not mean that it is "good." All markets can be in equilibrium, yet many people may lack sufficient income to buy even basic goods and services. Still, permitting markets to reach equilibrium is important be cause, when economic surplus is maximized, it is possible to pursue every goal more fully.