AP Micro Unit 3 Test 2 Vocabulary

Explicit Costs

Direct, out-of-pocket payments for resources (e.g., wages, rent, materials).

Implicit Costs

The opportunity costs of using resources the owner already owns (e.g., forgone salary).

Accounting Profit

Total Revenue minus Explicit Costs.

Economic Profit

Total Revenue minus both Explicit and Implicit costs (Total Opportunity Costs).

Normal Profit

Zero Economic Profit; the point where a firm covers all costs but has no incentive to leave.

Profit Max Rule

The golden rule for all firms: produce where Marginal Revenue equals Marginal Cost (MR=MC).

Marginal Revenue

The additional revenue earned from selling one additional unit of output.

Marginal Cost

The additional cost incurred from producing one additional unit of output.

Average Total Cost (ATC)

Total cost divided by the quantity of output produced.

Average Variable Cost (AVC)

Total variable cost divided by the quantity of output produced.

Short-Run (SR)

A period where at least one input (like capital or factory size) is fixed.

Long-Run (LR)

A period where all inputs are variable and firms can freely enter or exit the industry.

Shutdown Rule

A short-run decision to produce zero if the Price is less than the Average Variable Cost (P

Exit Decision

A long-run decision to leave the market permanently if Price is less than Average Total Cost (P

Entry Decision

A long-run decision to join a market if Price is greater than Average Total Cost (P>ATC).

Price Taker

A firm with no power to influence market price; it must accept the equilibrium price set by the market.

Short-Run Supply Curve

The portion of the Marginal Cost (MC) curve that lies above the AVC curve.

Allocative Efficiency

Producing the amount most desired by society, where Price equals Marginal Cost (P=MC).

Productive Efficiency

Producing at the lowest possible per-unit cost, where Price equals minimum ATC.

Long-Run Equilibrium

Occurs when firms earn zero economic profit and P=MC=minimum ATC.

Homogeneous Products

Goods that are identical across all sellers, making consumers indifferent to which firm they buy from.

Low Barriers to Entry

The ease with which firms can join or leave an industry; a key trait of perfect competition.

Diminishing Marginal Returns

As more variable inputs are added to fixed inputs, the additional output produced eventually declines.

Constant-Cost Industry

An industry where the entry or exit of firms does not change the resource prices or the ATC of firms.

Breakeven Price

The price at which a firm generates normal economic profit, where P=ATC.

Implicit cost of capital

The opportunity cost associated with using a firm's internal resources (like owner's equity or retained earnings) for a specific project instead of investing them elsewhere for a return.