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15. Principles of Economics (Brief Edition)_2e (6)

Chapter 6: Efficiency, Exchange,. and the Invisible Hand in Action.1. Define and explain the differences between. accounting profit, economic profit, and normal profit.2. Interpret why the quest for economic profit drives. firms to enter some industries and leave others.3. Explain why economic profit tends toward zero in. the long run.4. Explain why no opportunities for gain remain open. for individuals when a market is in equilibrium.5. Determine if the market equilibrium is socially. efficient.6. Calculate total economic surplus and explain how it. is affected by policies that prevent the market from. reaching equilibrium.McGraw­Hill/Irwin Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.Accounting Economic. Profit Profit.• Most common profit • Economic profit is the. idea difference between a firms. Accounting profit = total revenue and the sum. total revenue – of its explicit and implicit. explicit costs costs. – Also called excess profits. – Explicit costs are. • Implicit costs are the. payments firms. make to purchase opportunity costs of the. • Resources (labor,. resources supplied by the. land, etc.) and firms owners. • Products from other • Normal profit is the. firms difference between.• Easy to compute and accounting profit and. compare across firms economic profit. – Normal profits keep the. resources in their current use 6­2 Three Kinds of Profit. Total Revenue = Explicit Costs + Accounting Profit Total. Revenue Explicit. Costs. Explicit. Costs. Accounting. ProfitEconomic Normal Economic. Profit = Accounting Profit – Normal Profit. Profit Profit. 6­3 Two Functions of Price.• Rationing function of price distributes scarce. goods to the consumers who value them most. highly.• Allocative function of price directs resources. away from overcrowded markets to markets that. are underserved.• Invisible Hand Theory states that the actions of. independent, self-interested buyers and sellers. will often result in the most efficient allocation of. resources. – Articulated by Adam Smith in eighteenth century. 6­4Responses to Profits and Loses.• Firms enter the market in • Firms exit the market in. response to economic response to economic. profit loss. S S’. S’ S. P. Price ($/unit). P’. Price ($/unit). P’ P. D D. Q Q’ Q’ Q. Quantity (units/week) Quantity (units/week).