CHAPTER 7 Flashcards
Depreciation definition
Tax rule for spreading cost over lifetime of long lasting equipment —— decrease in value of equipment over time because of wear and tear and because it becomes obsolete
Obvious / explicit costs
Costs a business pays directly
Accounting profits formulas
Revenue — obvious costs (including depreciation)
Economic profits + hidden opportunity costs
Economic profits + implicit costs
Implicit costs
Hidden opportunity costs of what business owner could earn elsewhere with time and money invested
Like expected returns
Normal profits
Compensation for business owner’s time and money ;
Hidden opportunity costs;
What a business owner must earn to do as well as best alternative;
Average profits in other industries
Economic profits formula
Revenue — all opportunity costs
Revenue — (obvious costs + hidden opportunity costs)
Or
Revenue — ( obvious costs + normal profits)
Accounting profits — hidden opportunity costs
Negative economic profits
Economic losses
When revenue is less than all opportunity costs
Business owner did not make a smart decision
Better off if invested in alternatives
Economic losses
Business owner earns less than normal profits less than average profits in other industries
Prices not covering all of the business opportunity costs of production
Consumers don’t value the service
Red is
Economic loss signal
Yellow is
Equilibrium signal
Break even point
Business just earning normal profits no economic profits no economic losses
No reason to change
Green light
Signal economic profits
Smart decision
Short run market equilibrium
Quantity demanded = quantity supplied but economic losses or profits can lead to change in supply
Long run market equilibrium
Quantity demanded equals quantity applied
Economic profits are zero, no tendency for change
