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14 Cards in this Set
- Front
- Back
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Explicit costs |
The actual payments a firm makes to its factors of production and other suppliers |
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Accounting profit |
The difference between a firm's total revenue and its explicit costs |
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Implicit costs |
The opportunity costs of the resources supplied by the firm's owners |
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Economic profit (supernormal profit, excess profit) |
The difference between a firm's total revenue and the sum of its explicit and implicit costs |
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Normal profit |
The opportunity cost of the resources supplied by a firm's owners, equal to accounting profit minus economic profit |
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Rationing function of price |
To distribute scarce goods to those consumers who value them most highly |
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Allocative function of price |
To direct resources away from overcrowded markets and towards market that are underserved |
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"Invisible hand" theory |
Adam Smith's theory that the action of independent, self-interested buyers and sellers will often in the most efficient allocation of resources |
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Economic loss |
An economic profit that is less than zero |
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Barrier to entry |
Any force that prevents firms from entering a new market |
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Economic rent |
That part of the payment for a factor of production that exceeds the owner's reservation price |
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Time value of money |
The fact that a given euro amount today is equivalent to a larger euro amount in the future, because the money can be invested in an interest-bearing account in the meantime; After T years: PV-M/(1-r)T |
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Present value |
For an annual interest rate r, the present value (PV) of a payment (M) to be received after T years from now is the amount that would have to be deposited today at interest rate r |
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Efficient market hypothesis |
The theory that the current price of stock in a company reflects all the relevant information about its current and future earnings prospects |
