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

Marginal Revenue
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The change in a firm’s total revenue resulting from one additional unit of output

Marginal Revenue
Total cost
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The total expenditures made by a firm on land, capital, labor and the entrepreneurship of the business owner towards the production of a good or service at a particular level of output.

Total 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
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
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
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
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
Barriers to entry
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The factors which make it costly or difficult for a firm to begin producing a particular good. Might include high start-up costs, legal barriers such as patents and government licenses, or ownership of the factors of production.

Barriers to entry
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
Shut-down rule
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If a firm experiences economic losses in the short-run which exceeds the firm’s total fixed costs, then the firm can minimize its losses by shutting down

Shut-down rule

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