This chapter focuses on the connections between profits and resource allocation. Resources will flow towards activities where their owners can earn profits and will leave when profits turn into losses. Adam Smith argued that this would lead to an efficient allocation of resources and referred to this process as "the Invisible Hand." | Efficiency, Exchange, and the Invisible Hand in Action Chapter 7 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. 1 Learning Objectives Define and explain the differences between accounting profit, economic profit, and normal profit Explain the Invisible Hand Theory and show how economic profit and economic loss affect the allocation of resources across industries Explain why economic profit, unlike economic rent, tends toward zero in the long run Identify whether the market equilibrium is socially efficient, and explain why no opportunities for gain remain open for individuals when a market is in equilibrium Calculate total economic surplus and explain how it is affected by policies that prevent the market from reaching equilibrium 2 Markets Are Dynamic Every time you see one of these signs, you see the market dynamics at work: Store for Lease Going Out of Business Sale Everything Must Go Now Open Close-Out Model Under New Management 3 The . | Efficiency, Exchange, and the Invisible Hand in Action Chapter 7 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. 1 Learning Objectives Define and explain the differences between accounting profit, economic profit, and normal profit Explain the Invisible Hand Theory and show how economic profit and economic loss affect the allocation of resources across industries Explain why economic profit, unlike economic rent, tends toward zero in the long run Identify whether the market equilibrium is socially efficient, and explain why no opportunities for gain remain open for individuals when a market is in equilibrium Calculate total economic surplus and explain how it is affected by policies that prevent the market from reaching equilibrium 2 Markets Are Dynamic Every time you see one of these signs, you see the market dynamics at work: Store for Lease Going Out of Business Sale Everything Must Go Now Open Close-Out Model Under New Management 3 The Invisible Hand Individuals act in their own interests Aggregate outcome is collective well-being Profit motive Produces highly valued goods and services Allocates resources to their highest value use LeBron James does not receive training as a baseball player 4 Accounting Profit Most common profit idea Accounting profit = total revenue – explicit costs Explicit costs are payments firms make to purchase Resources (labor, land, etc.) and Products from other firms Easy to compute Easy to compare across firms 5 Economic Profit Economic profit is the difference between a firm's total revenue and the sum of its explicit and implicit costs Also called excess profits Implicit costs are the opportunity costs of the resources supplied by the firm's owners Normal profit is the difference between accounting profit and economic profit Normal profits keep the resources in their current use 6 Three Kinds of Profit Total Revenue Explicit Costs Accounting Profit Normal Profit Economic Profit Explicit Costs
