Ch. 15 - Entry, Exit, Long-Run Profitability Flashcards
What is accounting profit?
The total revenue a business recieves, less its explicit financial costs
What is economic profit?
The total revenue a firm recieves, less both explicit financial costs and the entrepreneur’s implicit opportunity costs
What is average revenue?
Revenue per unit, calculated as total revenue divided by the quantity supplied. Average revenue is equal to the price, if you charge everyone the same price
What is average cost?
Cost per unit, calculated as your firm’s total costs (including fixed & variable costs) divided by the quantity produced
What is profit margin?
Profits per unit sold = Average Revenue - Average Costs
What is the short run?
The horizon over which the production capacity, and the number & type of competitors you face, cannot change
What is the long run?
The horizon over which you, or your rivals, may expand or contract production capacity & new rivals may enter the market or existing firms may exit
What is the rational rule for entry?
You should enter a market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost
What is the rational rule for exit?
Exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs
What is free entry?
When there are no factors making it particularly difficult or costly for a business to enter or exit an industry
What are barriers to entry?
Obstacles that make it difficult for new firms to enter a market
What are the 4 big ideas to create barriers?
- Find ways to create customer lock in (demand-side strategies)
- Develop unique cost advantages (supply-side strategies)
- Mobilize the government to prevent entry (regulatory strategies)
- Convince potential entrals you’ll crush them (deterrence strategies)
