AP Micro Unit 3: Production, Cost and the Perfect Competition Model

A comprehensive set of flashcards covering production, cost concepts, and the perfect competition model from AP Microeconomics.

Profit

Total revenue minus total cost.

Total Revenue

Price x Quantity.

Explicit Costs

Costs that require paying of money.

Implicit Costs

Costs that do not require the paying of money; measured by the value of benefits given up.

Accounting Profit

The business's total revenue minus the explicit costs.

Economic Profit

Total revenue minus total cost, including both explicit and implicit costs.

Normal Profit

An economic profit equal to zero; just high enough to keep a firm engaged in its current activity.

Marginal Revenue

The change in total revenue generated by an additional unit of output.

Profit Maximizing Rule

Profit is maximized by producing the quantity of output where marginal revenue equals marginal cost (MR=MC).

Marginal Cost

The cost of producing one more unit, shown in a curve.

Fixed Input

An input whose quantity is fixed for a period and cannot be varied.

Variable Input

An input whose quantity can be varied at any time.

Fixed Cost (FC)

Cost incurred when producing zero quantity; independent of output quantity.

Variable Costs (VC)

Costs that depend on the quantity of output produced.

Total Cost (TC)

Total fixed costs plus total variable costs.

Long Run

The period in which all inputs can be varied.

Short Run

The period during which at least one of a firm's inputs is fixed.

Marginal Product

The increase in output from an additional unit of input.

Diminishing Returns to an Input

When an increase in the quantity of an input leads to a decline in its marginal product.

Total Cost Curve

Shows how total cost depends on the quantity of output.

Average Total Cost (ATC)

Total costs divided by quantity of output.

U-shaped Average Total Cost Curve

Falls at low levels of output, then rises at higher levels.

Average Fixed Cost (AFC)

Total fixed costs divided by quantity of output.

Average Variable Cost (AVC)

Variable cost divided by the quantity of output.

Average Product

Total product divided by the quantity of the input.

Average Product Curve

Shows the relationship between average product and the quantity of input.

Long-Run Average Total Cost Curve

Shows the relationship between output and average total cost when fixed cost minimizes ATC.

Economies of Scale

When long-run average total cost declines as output increases.

Increasing Returns to Scale

When output increases more than in proportion to an increase in all inputs.

Minimum Efficient Scale

Smallest quantity at which a firm's long-run average total cost is minimized.

Diseconomies of Scale

When long-run average total cost increases as output increases.

Decreasing Returns to Scale

When output increases less than proportionally to an increase in all inputs.

Constant Returns to Scale

When output increases directly in proportion to an increase in all inputs.

Price-Taking Firm

A firm whose actions do not affect the market price of the good or service it sells.

Price-Taking Consumer

A consumer whose actions do not affect the market price of the good or service they buy.

Perfectly Competitive Market

A market where all participants are price-takers.

Standardized Product (Commodity)

When consumer goods from different firms are regarded as the same.

Free Entry and Exit

When new firms can easily enter and existing firms can easily leave the industry.

Break-Even Point

The market price at which a price-taking firm earns zero profit.

Shut-Down Price

The market price below which a firm ceases production in the short run.

Long-Run Market Equilibrium

When all firms in the market are earning normal profit with no incentive to leave or enter.

Constant Cost Industry

When firms' cost curves are unaffected by changes in the size of the industry.

Increasing Cost Industry

When firms' production costs increase with the size of the industry.

Decreasing Cost Industry

When firms' production costs decrease as the industry grows.