CHAPTER 7 Flashcards

1
Q

Depreciation definition

A

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

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2
Q

Obvious / explicit costs

A

Costs a business pays directly

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3
Q

Accounting profits formulas

A

Revenue — obvious costs (including depreciation)

Economic profits + hidden opportunity costs

Economic profits + implicit costs

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4
Q

Implicit costs

A

Hidden opportunity costs of what business owner could earn elsewhere with time and money invested

Like expected returns

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5
Q

Normal profits

A

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

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6
Q

Economic profits formula

A

Revenue — all opportunity costs

Revenue — (obvious costs + hidden opportunity costs)

Or

Revenue — ( obvious costs + normal profits)

Accounting profits — hidden opportunity costs

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7
Q

Negative economic profits

A

Economic losses

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8
Q

When revenue is less than all opportunity costs

A

Business owner did not make a smart decision

Better off if invested in alternatives

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9
Q

Economic losses

A

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

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10
Q

Red is

A

Economic loss signal

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11
Q

Yellow is

A

Equilibrium signal

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12
Q

Break even point

A

Business just earning normal profits no economic profits no economic losses

No reason to change

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13
Q

Green light

A

Signal economic profits

Smart decision

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14
Q

Short run market equilibrium

A

Quantity demanded = quantity supplied but economic losses or profits can lead to change in supply

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15
Q

Long run market equilibrium

A

Quantity demanded equals quantity applied

Economic profits are zero, no tendency for change

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16
Q

Difference between short and long run market equilibrium

A

The additional time it takes for supply to change to adjust economic profits to zero

17
Q

When businesses exit the industry

A

Supply decreases

18
Q

Zero economic profits

A

Long run market equilibrium

Breaking even

19
Q

Hidden opportunity cost formula

A

Accounting profits — economic profits

(Revenues — obvious costs) — economic profits

20
Q

Calculating economic profits

A

Ignore depreciation costs

21
Q

True statements

A

Opportunity costs are greater than accounting costs

Economic profits are less than accounting profits