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

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
Total Revenue
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What a firm earns from the sale of its output. Equals the price of the output multiplied by the quantity sold.

Total Revenue
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
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
Interdependence
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When the level of profit of one firm in a market depends not only on that firm’s decisions regarding output and price but also on the decisions of the small number of other competitors in the market.

Interdependence
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
Variable Cost
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Costs which change with the level of output in the short-run. Typically these are the labor costs and raw material costs a firm faces. To produce more of a good in the short-run, more labor and raw materials are needed, so variable costs increase as output increases.

Variable Cost
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
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

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