chapter 15 Flashcards
best decision for you => depends on your
opportunity costs!
Accounting profit:
the total revenue a business receives, less its explicit financial costs
Accounting profit =
total revenue - explicit financial costs
Economic profit
the total revenue a business receives, less both
Economic profit =
total revenue - explicit financial costs - entrepreneur’s
implicit opportunity costs
average revenue
revenue per unit,calculated as the total revenue divided bythe quantity supplied
Average revenue is
equal to the price if you charge everyone the same price.
Your average cost
your cost perunit, calculated as your total costs(including fixed and variable costs)divided by the quantity produced.
The average cost is the sum of
fixed cost per unitand variable cost per unit
Recall your average revenue and your
price are the same.
Profit margin =
Avg. Revenue - Avg. Cost
Short-run analysis →
deciding quantity given today’s market price
Long-run analysis →
planning how much to invest for a businessexpansion; launch decisions
Cost-benefit principle:
It’s worth entering a new market if the benefits exceed thecosts.
Rational Rule for Entry
Enter a market if you expect to earn a positive economicprofit, which occurs when the price exceeds your average cost.
Cost-benefit principle: it’s worth exiting a market if
the costs exceed the benefits
Rational Rule for Exit:
exit a market if you expect to earn a negative economicprofit, which occurs when the price is less than your average cost.
Zero profit
occurs at the point where demand just touches average costs. → long run equilibrium!
Zero profit point: where demand
just touches average cost.
Zero profit point: where price just touches
average costs
Demand-side strategies
prevent new entrants from winning over your existing customers by creatingcustomer lock-in.
Barriers to entry
Demand-side strategies, Supply-side strategies, Regulatory strategies, Entry deterrence
2: Supply-side strategies
big Picture Goal: Deter the entry of new rivalsby gaining cost advantages that newcomerscannot easily replicate
Regulatory Strategies
Government regulates who can enter a market for two main reasons: (1.) to counter amarket failure, (2.) because politicians are swayed by corporate lobbyists.
4: Entry deterrence strategies
Big Picture Goal: Convince your potential rivals that if they enter your market, you willCRUSH THEM. These are some strategies that make your threat seem credible:
ways to regulate strategies
patents, Copyrights, and Trademarks:, Regulations make it difficult for new businesses to enter your market:, Compulsory government licenses can limit competition:, Businesses lobby to create new regulator barriers:
