AP micro u3

based on ppt

What is the difference between fixed inputs and variable inputs?

Variable inputs: Those that can be increased or decreased in the near term to change production (e.g., labor, raw materials).
Fixed inputs: Those that cannot be changed in the near term (e.g., factory size, heavy machinery).

Define Fixed Costs (FC).

Costs that do not vary with the level of output in the short run. They must be paid even if production is zero (e.g., rent, insurance).

Define Variable Costs (VC).

Costs that change directly with the level of output (e.g., wages for hourly labor, cost of ingredients).

What is the formula for Total Cost (TC)?

[ TC = FC + VC ]

On a cost graph, what does the vertical distance between the Total Cost (TC) curve and the Variable Cost (VC) curve represent?

It represents the Fixed Cost (FC), which remains constant at all levels of output.

What is the Production Function?

The relationship between the quantity of inputs a firm uses and the quantity of output it produces (essentially a "recipe" for production).

Define Short Run vs. Long Run in production.

Short Run: A period where at least one input (usually plant capacity/capital) is fixed.
Long Run: A period long enough for a firm to adjust the quantities of all resources employed, meaning all costs are variable.

What is Total Product (TP)?

The total quantity or amount of output produced by a firm using a specific combination of inputs.

What is the formula for Marginal Product of Labor (MPL)?

[ MPL = \frac{\Delta \text{Total Output}}{\Delta \text{Labor}} ]

Why does the Total Product curve initially increase rapidly when the first few workers are hired?

Due to specialization, where workers perform tasks best suited to their talents, increasing efficiency.

What is the Law of Diminishing Marginal Returns?

In the short run, as successive units of a variable resource (like labor) are added to a fixed resource (like capital), the additional output (marginal product) produced will eventually decline.

Does diminishing marginal returns happen because workers are inferior?

No. It occurs because there is a fixed amount of space or tools, causing additional workers to eventually get in each other's way or wait for equipment.

What is Marginal Cost (MC)?

The additional cost incurred by producing one more unit of output.

What is the formula for Marginal Cost (MC)?

[ MC = \frac{\Delta \text{Total Cost}}{\Delta \text{Quantity}} \text{ or } MC = \frac{\Delta \text{Variable Cost}}{\Delta \text{Quantity}} ]

Why does the Marginal Cost (MC) curve eventually slope upward?

Because of diminishing returns; as marginal product falls, it requires more resources (and thus more cost) to produce each additional unit of output.

What is Average Total Cost (ATC)?

The total cost per unit of output produced. Formula: [ ATC = \frac{TC}{Q} \text{ or } ATC = AVC + AFC ]

What is Average Variable Cost (AVC)?

The variable cost per unit of output. Formula: [ AVC = \frac{VC}{Q} ]

What is Average Fixed Cost (AFC)?

The fixed cost per unit of output. Formula: [ AFC = \frac{FC}{Q} ]

Why does Average Fixed Cost (AFC) always decline as output increases?

This is known as the spreading effect: since the total fixed cost is constant, dividing it by a larger and larger quantity makes the per-unit fixed cost smaller.

Why does the Average Total Cost (ATC) curve have a U-shape?

It is caused by the conflict between two effects:
1. Spreading Effect: Lowers ATC at low output levels as fixed costs are spread.
2. Diminishing Returns Effect: Pulls ATC upward at high output levels as average variable costs rise.

Where does the Marginal Cost (MC) curve intersect the ATC and AVC curves?

The MC curve always intersects the minimum point (bottom) of both the Average Total Cost (ATC) and Average Variable Cost (AVC) curves.

Explain the relationship between MC and ATC using the GPA analogy.

If your marginal grade (MC) is higher than your current GPA (ATC), your GPA rises. If your marginal grade is lower than your current GPA, your GPA falls.

What is the Long-Run Average Total Cost (LRATC) curve?

A curve showing the lowest possible average total cost for any output level when the firm can change its plant size (all inputs are variable).

Define Economies of Scale.

A situation where the LRATC decreases as output (or plant size) increases. Output increases at a faster rate than production costs.

What are three reasons for Economies of Scale?

1. Specialization: Larger scale allows labor and capital to be more specialized.
   2. High setup costs: Expensive machinery is only efficient if spread over many units.
   3. Bulk buying: Larger firms can negotiate lower prices for raw materials.

Define Diseconomies of Scale.

A situation where the LRATC increases as output (or plant size) increases. Production costs increase faster than output.

What is the primary cause of Diseconomies of Scale?

Coordination and communication problems that arise when a firm becomes too large and bureaucratic to manage efficiently.

What is a Sunk Cost?

A cost that has already been incurred and cannot be recovered. Economists argue that sunk costs should be ignored when making decisions about future actions.

Define Explicit Costs vs. Implicit Costs.

Explicit Costs: Actual monetary payments to outsiders for resources (e.g., wages, rent, materials).
Implicit Costs: The opportunity costs of using self-owned resources (e.g., forgone wages from another job, forgone interest).

What is the formula for Accounting Profit?

[ \text{Accounting Profit} = \text{Total Revenue} - \text{Explicit Costs} ]

What is the formula for Economic Profit?

[ \text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs}) ]

Why is Economic Profit always smaller than Accounting Profit?

Because Economic Profit subtracts both explicit and implicit costs, whereas Accounting Profit only subtracts explicit costs.

What is Normal Profit?

Also called "zero economic profit" or the "break-even point." It occurs when total revenue equals total economic costs (explicit + implicit). It is the minimum return needed to keep the entrepreneur in the market.

What are the four characteristics used to define a market structure?

1. Ability to influence price.
   2. Number of firms.
   3. Product differentiation.
   4. Barriers to entry.

What are the four characteristics of Pure (Perfect) Competition?

1. Very large number of independent sellers.
   2. Standardized product (perfect substitutes/identical).
   3. Price takers (no pricing power).
   4. Easy entry and exit (no barriers).

What does it mean for a firm to be a Price Taker?

The firm has no power to influence the market price; it must accept the price determined by industry supply and demand.

What is the shape of the demand curve for an individual firm in perfect competition?

It is perfectly elastic, represented by a horizontal line at the market price.

In perfect competition, the Price (P) is equal to which three other variables?

[ P = \text{Marginal Revenue (MR)} = \text{Average Revenue (AR)} = \text{Demand (D)} ]

What is Total Revenue (TR)?

The total amount of money a firm collects from sales. Formula: [ TR = P \times Q ]

What is Marginal Revenue (MR)?

The extra revenue a firm receives from selling one additional unit of output. Formula: [ MR = \frac{\Delta TR}{\Delta Q} ]

What is the Profit Maximization Rule (the MR=MC rule)?

A firm maximizes profit (or minimizes loss) by producing the quantity of output where Marginal Revenue equals Marginal Cost [ ( MR = MC ) ].

Under what condition should a firm shut down in the short run?

If the Price falls below the minimum Average Variable Cost (AVC) [ ( P < AVC ) ].

Why might a firm stay open in the short run even if it is losing money?

As long as the price is greater than AVC (( P > AVC )), the firm can use the excess revenue to pay off part of its fixed costs, which is better than paying the full fixed costs if they shut down.

On a graph, how is Economic Profit identified?

When Price is greater than Average Total Cost (( P > ATC )) at the profit-maximizing quantity (( MR=MC )).

On a graph, how is an Economic Loss identified?

When Price is less than Average Total Cost (( P < ATC )) at the profit-maximizing quantity (( MR=MC )).

Where does a firm Break Even (earn Normal Profit)?

Where Price equals Average Total Cost (( P = ATC )) at the profit-maximizing quantity.

What part of the Marginal Cost (MC) curve represents the individual firm's supply curve?

The portion of the MC curve that lies above the minimum Average Variable Cost (AVC).