Theory of the Firm Flashcards

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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
Oligopoly
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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
Wage
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The payment to labor in the resource market. Wages are the “price of labor”

Wage
Productive efficiency
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When a good is produces in the least cost manner, productive efficiency is achieved. This means that firms producing the good are achieving the lowest possible average production cost; in other words, they are producing at the lowest point on their average total cost curve, where marginal cost intersects the ATC. Among the four market structures (perfect competition, monopolistic competition, oligopoly and monopoly), only perfectly competitive firms will achieve productive efficiency in the long-run, since the price in the market will always be competed down to the firms’ minimum ATC.

Productive efficiency
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
Allocative efficiency
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When the level of output that society demands is produced by the firms in a market. If the marginal benefit enjoyed by consumers equals the marginal cost faced by producers, allocative efficiency is achieved. Only in perfect competition will allocative efficiency be achieved in the long-run, since the price of the good equals the marginal cost of the producers. In imperfectly competitive markets, the price will always be higher than the marginal cost of the firms, indicating that resources are under-allocated towards the product.

Allocative efficiency
Diseconomies of scale
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When a firm gets “too big for its own good”. If a firm expands beyond a certain size, it begins experiencing inefficiencies that cause its average costs to rise as output increases.

Diseconomies of scale
Marginal Cost
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The change in total costs resulting from an increase in output by one unit in the short run.

Marginal Cost
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
Economies of Scale
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“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

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