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

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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.

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

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

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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.

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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.

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The implicit cost faced by the owner of a business firm. A business owner will wish to cover all of his explicit costs (wages, rents and interest payment), but also earn a “normal” level of profit in order to remain in a market in the long run. If a normal level of profit is not enjoyed by the entrepreneur, he will shut down his business and re-allocated his resources into another industry in which a higher level of profit can be earned. Normal profit is a cost, because if it is not earned, a firm will eventually shut down.

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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.

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What must be given up to have anything else. Not necessarily monetary costs, rather include what you could do with the resources you use to undertake any activity or exchange.

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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.

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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.

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