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

Indirect Taxation
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Taxes placed on consumption. Considered indirect because households only pay them when they buy a good, compared to a direct tax on their income.

Indirect Taxation
Homogenous
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Means “identical”. The output of a perfectly competitive firm is homogeneous to all other firms in the market.

Homogenous
Average variable cost
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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 Product
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The change in the total product resulting from the addition of one worker in the short run.

Marginal Product
Profit
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The payment to the entrepreneur in the resource market. A business owner expects to earn a “normal” level of profit, otherwise it will not be worth his while to remain in a market. In this regard, profit is a cost of production, because if a minimum profit is not earned a firm will shut down.

Profit
Break-even price
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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
Per unit tax
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A tax levied on producers for every unit produced. In contrast to a lump sum tax, which is a one time payment from producers to the government. A per unit tax increases firm’s marginal cost and average variable cost (thus, also the average total cost), but does not affect fixed costs. A per unit tax will likely cause a firm to reduce its output in the short-run, since MC shifts up and moves along the demand curve.

Per unit tax
Differentiation
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When firms attempt to set their products apart from the competition through improvements in technology, branding, service, location and other means. The goal is to increase demand for the individual firm’s product at the expense of the competition, giving the firm more price marking power and allowing for economic profits to be earned.

Differentiation
Collusion
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When oligopolistic sellers cooperate on output and price, allowing for a more optimal payoff (profit) that would be achieved under competition.

Collusion
Scarcity
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When something is both desired and limited in supply. All resources (land, labor and capital) are limited in supply, yet desired for their use in the production of goods and services.

Scarcity

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