Entry, exit, and industry supply Flashcards
free entry and exit of firms in an industry depends on
decisions are based on profits—total revenue less total costs.
If profits are positive, there is incentive to enter the industry.
If profits are negative, there is incentive to exit the industry
. When profits are equal to zero, there is no incentive for either entry or exit.
how does entry and exit of firms affect the market supply curve?
shifts the supply curve
what is a competitive market?
one in which a single firm cannot affect the price. The firm takes the market price as given.
what is accounting profit?
Total revenue - total cost (explicit costs)
profit reported by firms
what is economic profit?
takes into account opportunity costs (the cost of forgoing an alternative)
total revenue - explicit & implicit (opportunity) costs
what is your profit when you’re trying to make decisions
what is zero economic profit?
when total revenue = explicit & implicit costs
if economic profit is 0, accounting profit must be positive (normal profit)
accounting profits for a movie rental store are $40,000 a year. Suppose the owner of the store could earn $35,000 a year running a bakery. Suppose also that the owner could sell the business for $50,000 and invest the money in a bank, where it would earn interest at 6 percent per year, or $3,000.
Find economic profit
opportunity cost—which the accountant would not include in total costs—is $38,000 ($35,000 plus $3,000). To get economic profits, we have to subtract this opportunity cost from accounting profits. Thus, economic profits would be only $2,000.
what does economic profit measure?
measure the incentive for firms have to either enter or exit an industry.
If economic profits are positive, there is an incentive to stay in the business
what is normal profit?
the amount of accounting profits when economic profits are equal to zero.
No incentive for firm as to entering or exiting industry
why do firms produce at the minimum of ATC?
At this point, costs per unit are at a minimum
It means that goods are produced at the lowest cost, with the price consumers pay being equal to that lowest cost.
entry and exit in competitive markets allow
- ATC to be minimised
- Efficient allocation of capital among industries (Booming industries will see entry of new firms and expansion of existing ones, which leads to more capital being allocated. Shrinking industries will see exit of firms and shrinking of firm size, which frees up capital for booming industries. )
