Ap micro unit 3

Law of Diminishing Marginal Returns

As more variable inputs are added to fixed inputs, marginal product eventually decreases.

Why does diminishing marginal returns occur?

Because at least one factor of production is fixed in the short run.

Total Product (TP)

The total quantity of output produced by a firm.

Marginal Product (MP)

The change in total product from hiring one additional worker.

Marginal Product Formula

MP = change in total product ÷ change in labor.

When does diminishing marginal returns set in?

When marginal product begins to decrease.

Stage I of Production

Marginal product is increasing and total product is rising at an increasing rate.

Stage II of Production

Marginal product is positive but decreasing; this is the efficient stage of production.

Stage III of Production

Marginal product is negative and total product is falling.

Fixed Costs (FC)

Costs that do not change as output changes.

Variable Costs (VC)

Costs that change as output changes.

Total Cost (TC)

The sum of fixed and variable costs.

Total Cost Formula

TC = FC + VC

Marginal Cost (MC)

The cost of producing one additional unit of output.

Marginal Cost Formula

MC = change in total cost ÷ change in quantity.

What costs affect marginal cost?

Only variable costs affect marginal cost.

Average Fixed Cost (AFC)

Fixed cost divided by quantity produced.

Average Variable Cost (AVC)

Variable cost divided by quantity produced.

Average Total Cost (ATC)

Total cost divided by quantity produced.

Average Total Cost Formula

ATC = AFC + AVC

Behavior of Average Fixed Cost

Average fixed cost always decreases as output increases.

When marginal cost is less than average total cost

Average total cost is falling.

When marginal cost is greater than average total cost

Average total cost is rising.

Where does marginal cost intersect ATC?

At the minimum point of average total cost.

Where does marginal cost intersect AVC?

At the minimum point of average variable cost.

Shape of the marginal cost curve

U-shaped due to diminishing marginal returns.

Shape of the average variable cost curve

U-shaped and lies below the ATC curve.

Shape of the average total cost curve

U-shaped.

Shape of the average fixed cost curve

Downward sloping.

Perfect competition characteristics

Many buyers and sellers, identical products, price takers, free entry and exit.

Marginal revenue in perfect competition

Marginal revenue equals price.

Firm’s short-run supply curve

The marginal cost curve above average variable cost.

Shutdown rule

A firm shuts down when price is less than average variable cost.

Operate at a loss condition

A firm operates when price is between AVC and ATC.

Accounting profit

Total revenue minus explicit costs.

Economic profit

Total revenue minus explicit and implicit costs.

Normal profit

Economic profit equal to zero.

If economic profit

is zero, accounting profit is

Positive.

Profit-maximizing rule

Produce where marginal revenue equals marginal cost.

Profit formula

Profit explains total revenue minus total cost.

Long run definition

A period of time in which all costs are variable.

Economies of scale

Long-run average total cost decreases as output increases.

Diseconomies of scale

Long-run average total cost increases as output increases.

Minimum efficient scale (MES)

The lowest output level at which long-run average total cost is minimized.