Chapter 8 - Chapter 8 The Quest for Profit and the...

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Chapter 8 The Quest for Profit and the Invisible Hand Efficiently functioning markets are self idling Smith discusses: o Price Mechanism o   Profit Motive Self Interest Leads Market Forces automatically provides what market needs Firms want to maximize profit, not consumer happiness Market economies hardly ever have a shortage Profit motive ensures lack of shortages 3 Types of Profit: Accounting Profit = Total Revenue - Explicit Costs Economic Profit = Total Revenue – Explicit Costs - Implicit Normal Profit = Accounting Profit – Economic Profit o In U.S., usually 6% Nominal Profit – Inflation = Real Profit Ex.  Total Sales of    400,000 Explicit Costs +250,000 Account Profit   150,000 Opp. Cost  -100,000 Economic Profit     50,000 Prices Serve 2 Important Functions: 1. Rationing Function: Market Equilibrium prices keep out excessive claims by selling for marginal cost
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This note was uploaded on 04/29/2008 for the course ECON 160 taught by Professor Khan during the Spring '08 term at Hobart and William Smith Colleges.

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Chapter 8 - Chapter 8 The Quest for Profit and the...

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