Econ 101: Chapter 15

Question 1

Accounting profit

Answer 1

the total revenue a business receives, minus its explicit out of pocket financial costs.

Question 2

total revenue

Answer 2

all of the income received from all sources.

Question 3

explicit financial costs

Answer 3

all the money that leaves your business (rent, wages, cost of raw materials)

Question 4

Accounting profit =

Answer 4

total revenue - explicit financial costs

Question 5

implicit opportunity costs

Answer 5

includes forgone wages and forgone interest

Question 6

economic profit

Answer 6

the total revenue a firm receives, minus both explicit financial costs and the entrepreneurs implicit opportunity costs.

Question 7

Economic profit =

Answer 7

total revenue - explicit financial costs - implicit opportunity costs

Question 8

Why do accountants and economists disagree on what profit is?

Answer 8

Accountants want to follow where the money goes.

Economists want to make the best decision.

Question 9

Average revenue

Answer 9

the revenue per unit

Question 10

average revenue is equal to

Answer 10

price, if you charge everybody the same price.

Question 11

Average revenue curve is also the

Answer 11

firm demand curve.

Question 12

average revenue =

Answer 12

(total revenue / quantity ) = price

Question 13

average cost

Answer 13

the cost per unit

Question 14

Average cost =

Answer 14

(total cost / quantity) = (fixed cost / quantity) + (variable cost / quantity)

Question 15

fixed cost

Answer 15

expenses that don’t vary with the quantity you produce.

Question 16

variable cost

Answer 16

vary with the quantity you produce.

Question 17

spreading your fixed cost

Answer 17

As you produce a larger quantity, the fixed cost gets “spread” over more and more units.

Question 18

rising variable cost

Answer 18

Inefficiencies make it increasingly expensive to increase your production.

Question 19

profit margin

Answer 19

the profit per unit sold

Question 20

profit margin =

Answer 20

average revenue (price) - average cost

Question 21

short run

Answer 21

the time horizon over which the production capacity, and the number and type of competitors you face, cannot change.

Question 22

long run

Answer 22

the time horizon over which you, or your rivals, may expand or contract production capacity and new rivals may enter the market or existing firms may exit.

Question 23

Rational Rule for Entry

Answer 23

you should enter a market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost.

Question 24

new competitors makes your business…

Answer 24

lose profit and market power

Question 25

Rational Rule for Exit

Answer 25

exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs.

Question 26

competitors leaving makes your business..

Answer 26

regain profit and market power

Question 27

free entry

Answer 27

when there are no factors making it particularly difficult or costly for a business to enter or exit an industry.

Question 28

free entry causes…

Answer 28

profitable markets to reach zero economic profit in the long run.

Question 29

free exit causes…

Answer 29

unprofitable markets to reach zero economic profit in the long run.

Question 30

Why is there a focus on average cost?

Answer 30

We are focused on the marginal supplier –> profit margin depends on average cost.

Question 31

barriers to entry

Answer 31

obstacles that make it difficult for new firms to enter a market.

Question 32

4 strategy types to outcompete and deter potential market entrants:

Answer 32

demand-side, supply-side, regulatory, deterrence

Question 33

Demand side strategies include…

Answer 33

switching costs, reputation and goodwill, and network effects.

Question 34

switching costs

Answer 34

an impediment that makes it costly for customers to switch to buying from another business.

Question 35

network effects

Answer 35

make your product more useful the more people use it.

Question 36

supply side strategies involve…

Answer 36

developing unique cost advantages.

Question 37

devlop unique cost advantages by…

Answer 37

learning by doing, mass production, research and development, relationships with suppliers, and access to key inputs.

Question 38

regulatory strategies involve…

Answer 38

mobilizing the government

Question 39

patents

Answer 39

(regulatory strategy) give you the right to be the only producer; no other company can use your idea without your permission.

Question 40

regulatory strategies can be…

Answer 40

patents, government regulations to starting a business, compulsory licenses, lobbying.

Question 41

deterrence strategies involve…

Answer 41

convincing potential entrants you’ll crush them.

Question 42

brand proliferation

Answer 42

the process of creating multiple brands under one parent company.

Question 43

brand proliferation ensures that…

Answer 43

there are no profitable niches for a rival to exploit.

Question 44

pro-market policies

Answer 44

ensure that consumers enjoy the benefits of robust competition in the market.

Question 45

pro-business policies

Answer 45

help existing businesses, often at the cost of destroying opportunities for potential new entrants.

Question 46

long run equilibrium

Answer 46

where the firm demand curve just touches the average cost curve.