Chapter_8

Chapter_8 - TheInvisibleHandin TheInvisibleHandin Action

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The Invisible Hand in  The Invisible Hand in  Action Action
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“It is not from the benevolence of the butcher, the brewer, or the  baker that we expect our dinner, but from their regard of their  own interest. We address ourselves not to their humanity but  their self-love, and never talk to them of our necessities, but of their advantage.” Individuals act in their own interests Aggregate outcome is collective well-being It is as if “the entrepreneur is led by an invisible hand to  promote an end which was no part of his intention.”
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The Invisible Hand The Invisible Hand Profit motive  Produces highly valued goods and services Allocates resources to their highest value use
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Accounting Profit 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
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Economic Profit Economic Profit Economic profit  = total revenue -    explicit  costs - implicit costs Implicit costs : the opportunity cost of the  resources supplied by the firm's owners Normal profit : the difference between  accounting profit and economic profit Normal profits keep the resources in their current  use
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Three Kinds of Profit Three Kinds of Profit Total Revenue Explicit Costs Accounting Profit Normal Profit Economic Profit Explicit Costs Total Revenue = Explicit Costs + Accounting Profit Economic Profit = Accounting Profit – Normal Profit
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Economic Profits Guide Decisions Economic Profits Guide Decisions You own a small restaurant. The  restaurant has an annual sales revenue of  $200,000. The costs of food ingredients,  utility, rent, chefs and waitresses amount  to $120,000 in total. Should you stay in  this business? 
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Two Functions of Price Two Functions of Price Rationing function:  price distributes scarce  goods to the consumers who value them most 
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Chapter_8 - TheInvisibleHandin TheInvisibleHandin Action

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