All Flashcards
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 the key difference between accounting and economic profit?
Economic profit includes implicit costs, while accounting profit does not.
How do normal profit and economic profit differ?
Normal profit means economic profit is zero; economic profit can be positive, negative, or zero.
Compare explicit and implicit costs.
Explicit costs are out-of-pocket expenses; implicit costs are opportunity costs.
What is the difference between economic loss and normal profit?
Economic loss means total costs exceed total revenue; normal profit means economic profit is zero.
How does supernormal profit differ from normal profit?
Supernormal profit is profit above normal profit, indicating economic profit is positive.
Differentiate between accounting profit and cash flow.
Accounting profit is a measure of profitability, while cash flow tracks the movement of cash in and out of a business.
Compare economic profit in the short run versus the long run.
Firms can experience supernormal economic profit in the short run, but in perfectly competitive markets, this is unsustainable in the long run.
How do fixed costs differ from implicit costs?
Fixed costs are costs that do not vary with output, while implicit costs are opportunity costs of using resources.
What's the difference between revenue and economic profit?
Revenue is the total income from sales, while economic profit is revenue minus all explicit and implicit costs.
How does the concept of economic rent relate to supernormal profit?
Economic rent is similar to supernormal profit, representing earnings above what is required to keep a resource employed in its current use.
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 30,000 on ingredients, and could earn $25,000 working elsewhere. What's their economic profit?
30,000 - 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.