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

Subsidy
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Payments made from the government to individuals or firms for the production or consumption of particular goods or services. Subsidies reduce the cost of production or increase the benefit of consumption, and therefore lead to a greater equilibrium quantity in the market for the subsidized good.

Subsidy
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
Contestable markets
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A monopolistically competitive market in which economic profits are being earned. Barriers to entry are relatively low and new firms may enter the market to grab profits, and easily leave once no more profits can be earned.

Contestable markets
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
Lump sum tax
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A one-time payment from producers to the government. Contrasts with a per unit tax, which is levied on every unit of output produced, thus increases in size as output increases. A lump sum tax increases firms’ average fixed cost, and thus average total cost, but has no effect on marginal cost or average variable cost.

Lump sum tax
Total Product
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The total output of a firm.

Total Product
Shut-down price
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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
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
Cartel
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When oligopolistic sellers agree to act together to restrict output and raise the price, essentially producing at the monopoly level of output.

Cartel
Productivity
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The output per unit of input of a resource. An important determinant of the level of aggregate supply in a nation. Will increase as a result of better or more capital, education and health, all which add to the human capital of a nation.

Productivity

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