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

Diminishing marginal returns
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The principle which says that as more of a variable resource (usually labor) is added to fixed resources (land and capital), the output attributable to additional units of the variable resource declines as more and more is added. Explained by the fact that in order for workers to remain productive as more workers are hired, more capital is needed. Without more capital, productivity declines as labor is added to production.

Diminishing marginal returns
Average fixed cost
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The total fixed costs (of land and capital) of a particular level of output divided by the quantity being produced.

Average fixed cost
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
Monopolistic Competition

A market in which a relatively large number of firms competes with one another by differentiating their products from the competition. Economic profits can be earned in the short-run through successful product differentiation, but due to the low barriers to entry they are unlikely in the long-run. Monopolistic competition is the most common market structure, and included restaurants, automobiles, clothes, salons, etc…

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Monopolistic Competition
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
Perfect Competition
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A market structure in which a very large number of firms compete to sell a homogeneous product. There are no barriers to entry or exit, no firm is able to charge a price higher than any other firm, and in the long-run no economic profits or losses will be earned by the firms in the market.

Perfect Competition
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
Average total cost
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The total cost of a particular level of output divided by the quantity produced. Equals the average variable cost plus the average fixed cost.

Average total cost
Total Product
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The total output of a firm.

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

Entrepreneurship

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