Theory of the Firm Flashcards

Only 10 flashcards are shown at a time! Once you’ve mastered these 10 Economic terms, click the shuffle button below for 10 new terms. There are approximately 45 flashcards covering Theory of the Firm

Oligopoly
Click to view the definition
Click to view the Economic term

A market in which a relatively small number of firms compete with one another in a strategic manner. Characterized by a strong interdependence between the small number of firms. Barriers to entry are high and firms are hesitant to change their prices due to the fact that price wars may result when prices are lowered, and significant market share can be lost if prices are raised. Such markets tend to be highly inefficient due to the lack of competition.

Oligopoly
Price discrimination
Click to view the definition
Click to view the Economic term

The practice of a firm charging different prices to different consumers for an identical product. Only possible if the firm can a) segregate the market between consumers with different elasticities of demand, and b) prevent resale of the good.

Price discrimination
Shut-down price
Click to view the definition
Click to view the Economic term

If the price of a good falls below a firm’s minimum average variable cost, there is no way the firm can hope to cover its labor costs in the short-run, thus the firm must shut down.

Shut-down price
Break-even price
Click to view the definition
Click to view the Economic term

When a firm produces at a price and quantity combination at which the price equals the firm’s average total cost of production. The firm covers all of its explicit and implicit costs and thus earns a normal profit, but no economic profit. The firm’s total revenue equals its total costs. No economic profits are losses are being earned.

Break-even price
Economies of Scale
Click to view the definition
Click to view the Economic term

“The benefits of being big.” As a firm increases its output in the long run, it adds more factories, acquires more capital and land and labor and sees its average total costs decrease as it grows. This arises due to factors such as increase efficiency, bulk-ordering, reduced shipping costs, increased bargaining power with resource suppliers and labor unions, more favorable interest rates from lenders, etc…

Economies of Scale
Entrepreneurship
Click to view the definition
Click to view the Economic term

The creativity and innovation an individual business owner puts towards the production of goods and services.

Entrepreneurship
Economic profit
Click to view the definition
Click to view the Economic term

Also called “abnormal” profit. This is the revenues earned by a firm beyond that which is needed to cover all explicit costs (wages, rent and interest) and what the business owner expects to earn (normal profit). Entrepreneurs are attracted to industries in which economic profits can be earned.

Economic profit
Average variable cost
Click to view the definition
Click to view the Economic term

The total variable costs (of labor and raw materials) of a particular level of output divided by the quantity being produced.

Average variable cost
Marginal Cost
Click to view the definition
Click to view the Economic term

The change in total costs resulting from an increase in output by one unit in the short run.

Marginal Cost
Natural Monopoly
Click to view the definition
Click to view the Economic term

A market in which the demand for the product intersects the single firm’s average total cost curve while it is still downward sloping. In other words, there is not enough demand to warrant more than one firm producing the good. Society is actually better off with a single producer. Examples include utilities such as electricity and water. Often natural monopolies are regulated by government to assure a more socially optimal level of output and price.

Natural Monopoly

SHOW ME 10 NEW FLASHCARDS!!

Study Flashcards for a specific unit:

Leave a Comment