AP Microecon Unit 3

Total revenue

amount a firm receives from the sale of goods or services (Q x P)

Total cost

amount a firm spends to produce and/or sell goods or services (implicit + explicit)

Explicit cost

tangible out of pocket cost

Implicit cost

cost of resources already owned and opportunity cost (ex. salary you would have earned working somewhere else)

Accounting profit

Total revenue - explicit costs

Economic profit

Total revenue - total cost

Short run

time frame in which resources can be fixed or variable

Long run

All resources are variable

Marginal return

the additional output or profit gained from one additional unit of a variable input, such as labor

Law of diminishing marginal return

as successive units of a variable resource (such as labor) are added to a fixed resource (such as capital or land), beyond some point the extra (marginal) product that can be attributed to each unit of the variable resource will decline

Relationship between MP and AP

Average product is increasing (MP > AP)

Average product is decreasing (MP < AP)

Average product = Marginal product (the average product is at its maximum)

Output

what the firm produces

Marginal product

change in output associated with one additional unit of input

diminishing marginal product

occurs when successive increases in inputs are associated with a slower rise in output

Economies of scale

the long run average total cost declines as output expands (negative slope)

Diseconomies of scale

the long run average total cost rises as output expands (positive slope)

Constant return to scale

the long run total cost remains constant as output expands (straight line)

Perfect competition

numerous small firms selling identical products, and no barriers to entry or exit. no single participant has market power. 

Monopolistic competition

many firms selling differentiated products. companies have some control over their prices due to product differentiation, but face competition from many other businesses. 

Oligopoly

structure with limited competition, in which a market is shared by a small number of producers or sellers

Monopoly

a market structure where a single company is the sole supplier of a good or service, resulting in a lack of competition

Profit maximization rule

Production should stop when marginal revenue = marginal cost because there are no more opportunities for profit

P > ATC

a profit is made

ATC > P > AVC

the firm will operate to minimize loss

AVC > P

the firm will temporarily shut down

Price taker

has no control over the price set by the market, so they must accept the price determined by supply and demand

Characteristics of a competitive market

many sellers, similar products, free entry/exit, price taking, and small firms

Sunk costs

unrecoverable costs that have been incurred as a result of past decisions

Perfectly competitive markets in the long run

drive economic profit to zero (ATC = Price)

Average fixed cost

total fixed cost/output

Average total cost

total cost/output (or AVC + AFC)

Average variable cost

total variable cost/output

Long run shut down rule

if the price falls below ATC the firm must shut down

interest

price paid for borrowing money or, conversely, the compensation a lender receives for temporarily forgoing the use of their funds (ex. interest on money in a bank)

fixed cost

cost that doesn’t change with amount of output produced

variable cost

cost that changes with amount of output produced