3. Economic Theory Of The Firm Flashcards
What is microeconomics?
Microeconomics is the study of how individuals, households, and firms make decisions and interact in markets.
What is the meaning of the word ‘economics’?
It originates from the Greek word meaning ‘the one who manages a household’ or simply ‘manager’.
What is scarcity in economics?
Scarcity refers to the limited availability of resources, meaning not all wants and needs can be satisfied.
What is a ‘good’ in economics?
A good is a beneficial, tangible item that satisfies human wants or needs.
What are the three main types of goods?
- Scarce Goods (Economic Goods) – Limited supply, requires payment.
- Free Goods – Unlimited supply, no payment required (e.g., air, sunlight).
- Numeraire Goods – Used to express value of other goods (e.g., money, gold, bitcoin).
What is efficiency in economics?
Efficiency means getting the most out of available resources while minimizing waste.
What are the two main types of efficiency?
- Allocative Efficiency – Every product that can be produced is supplied to a willing buyer.
- Productive Efficiency – Goods and services are produced at the lowest possible cost.
What is opportunity cost?
The value of the next best alternative that is forgone when making a decision.
What is marginal cost and marginal benefit?
- Marginal Cost (MC): The cost of producing one more unit of a good.
- Marginal Benefit (MB): The additional benefit gained from consuming one more unit of a good.
What is an incentive in economics?
An incentive is something that motivates an individual to perform an action or choose an option.
What is a market?
A structure where buyers and sellers interact to exchange goods, services, or assets.
What is market failure?
A situation where the market does not allocate resources efficiently, often requiring government intervention.
What is inflation?
The rate at which the general price level of goods and services rises over time, reducing money’s purchasing power.
What is the law of demand?
As the price of a good decreases, the quantity demanded increases, and vice versa.
What is the law of supply?
As the price of a good increases, the quantity supplied increases, and vice versa.
What is market equilibrium?
The point where the quantity demanded equals the quantity supplied, determining the equilibrium price.
What is the ‘invisible hand’ of the market?
A concept by Adam Smith describing how individuals’ self-interested actions can lead to beneficial economic outcomes.
What is price elasticity of demand (PED)?
A measure of how much the quantity demanded of a good responds to a change in price.
What is price elasticity of supply (PES)?
A measure of how much the quantity supplied of a good responds to a change in price.
What are the four main types of market structures?
- Perfect Competition – Many buyers and sellers, identical products.
- Monopolistic Competition – Many sellers, differentiated products.
- Oligopoly – Few sellers, strategic decision-making.
- Monopoly – One seller dominates the market.
What is the Theory of the Firm?
A set of economic theories that explain how firms behave in a market, including price-setting and production decisions.
What is total revenue (TR)?
The total income a firm earns from selling its products, calculated as: TR = Price × Quantity Sold.
What are the three primary factors of production?
- Land – Natural resources.
- Labor – Human effort.
- Capital – Machinery, tools, buildings.
What is profit (π) in economics?
The difference between total revenue (TR) and total cost (TC).
π = TR - TC
