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How does economic profit influence a firm's entry into a market?
Firms enter markets where they anticipate positive economic profit.
How does economic loss affect a firm's production decisions?
Firms experiencing economic losses will likely reduce output or exit the market.
A baker earns $50,000 revenue, spends $30,000 on ingredients, and could earn $25,000 working elsewhere. What's their economic profit?
$50,000 - $30,000 - $25,000 = -$5,000 (Economic Loss)
If a firm's accounting profit is positive but its economic profit is zero, what does this indicate?
The firm is earning a normal profit, covering all explicit and implicit costs.
How do supernormal profits affect competition in a market?
Supernormal profits can attract new firms to enter the market, increasing competition.
A software engineer quits a $100,000/year job to start a company. What's the implicit cost?
The implicit cost is the forgone salary of $100,000.
How does the concept of opportunity cost relate to implicit costs?
Implicit costs are a direct measure of opportunity cost, representing the value of the next best alternative forgone.
Why is economic profit a more comprehensive measure of profitability than accounting profit?
Economic profit considers both explicit and implicit costs, providing a more accurate picture of a firm's true profitability.
How do profits and losses signal resource allocation in an economy?
Profits attract resources to successful industries, while losses signal resources to move elsewhere.
In a perfectly competitive market, why can't firms sustain supernormal profits in the long run?
New firms will enter the market, increasing supply and driving down prices until profits return to normal.
How might a tax on accounting profits affect a firm's investment decisions?
It might reduce investment, as the after-tax return on investment decreases.
How might subsidies impact firms experiencing economic losses?
Subsidies can help firms cover their costs and remain in the market, even with economic losses.
How could government regulation impact a firm's implicit costs?
Regulations that limit business activities can increase implicit costs by restricting alternative uses of resources.
What is the potential impact of price ceilings on firm profitability?
Price ceilings can reduce total revenue and potentially lead to economic losses for firms.
How might a minimum wage law affect firms' explicit costs?
A minimum wage law increases firms' explicit costs in the form of higher wage expenses.
How can intellectual property rights affect supernormal profits?
Intellectual property rights, like patents, can allow firms to maintain supernormal profits by limiting competition.
How do environmental regulations affect a firm's costs?
Environmental regulations can increase a firm's explicit costs through required investments in pollution control equipment and compliance measures.
How might trade policies, such as tariffs, affect a firm's profitability?
Tariffs can increase the cost of imported inputs, reducing profitability, or protect domestic firms, increasing profitability.
How can government subsidies for research and development (R&D) affect a firm's long-term profitability?
Subsidies for R&D can lead to innovation and new products, potentially increasing long-term profitability.
What is the impact of corporate tax cuts on economic profit?
Corporate tax cuts can increase economic profit by reducing the explicit costs associated with taxes.
What is Accounting Profit?
Total revenue minus explicit costs.
What are Explicit Costs?
Out-of-pocket expenses, like wages and rent.
What is Economic Profit?
Accounting profit minus implicit costs.
What are Implicit Costs?
Opportunity costs of using resources.
What is Normal Profit?
When economic profit is zero.
What is Economic Loss?
When total costs exceed total revenue.
What is Supernormal Profit?
Profits greater than normal profit (economic profits).
Define Total Revenue (TR).
The total income a firm generates from selling its products or services.
Define Total Costs (TC).
The sum of all costs a firm incurs in producing its output, including both explicit and implicit costs.
What is the break-even point from an economist's perspective?
The point where a firm makes normal profit.