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Flashcards in Theory of the Firm Definitions Deck (19)
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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



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



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
- 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