Theory of the Firm Definitions Flashcards
Profit Maximisation
The level of output where the marginal revenue equals the marginal cost (MR=MC)
Revenue Maximisation
The level of output where the marginal revenue cuts the x-axis (MR=0)
Predatory pricing
Firms charging very low prices in order to gain more market share in the industry - sacrificing profits for dominance in the market
Satisficing behaviour
Accepting or being satisfied with a lower level of output
Principal-agent problem
The objectives of the owners of a firm and the objectives of the managers of firm being different
Perfect Competition
A market where there is a large number of firms producing identical products, each with no ability to set prices
Monopoly
A market where one firm dominates the market for a good that has no substitutes and where there significant barriers to entry.
Monopoly power
The ability to set price in a market
Monopolistic Competition
A market structure where there are many buyers and sellers, producing differentiated products, with low barriers to entry or exit. They have some monopoly power
Oligopoly
A market structure where there are few firms dominate the market selling identical or differentiated products. They have significant market power.
Allocative efficiency
When consumers pay a market price that reflects the private marginal cost of production; P=MC
Productive efficiency
When a firm is combining resources in such a way as to produce a given output at the lowest possible average total cost; MC=ATC
Non-price competition
Where firms attempt to win a competitive advantage over their rivals by strategies other than reducing price - involves product differentiation
Economies of scale
Unit cost advantages that a business may experience as an outcome of increasing its scale of operations Types: - Specialization - Efficiency - Marketing - Indivisibilities
Variable costs
Costs of production that change as output changes i.e. direct labor costs, costs of raw materials
Fixed costs
Costs of production that are independent of the level of output and exist even if output is zero i.e. rental lease, property taxes, insurance
Normal profit
Revenue that covers all costs including opportunity cost; implicit and explicit costs covered by revenue
Decreasing returns to scale
A production technology where a 1% increase in all inputs lead to a smaller than 1% increase in output; diseconomies of scale
Law of diminishing returns
Increased variable factors of production added to the production process, when at least one factor of production is fixed, will at some point result in falling marginal output
