AP Microeconomics Unit 3 Review

Explicit cost

A cost that involves actually laying out money; payment paid by firm for using resources of others

Implicit cost

Does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone

Accounting profit

Of a business is the business's total revenue minus the explicit cost (and depreciation)

Economic profit

Of a business is the business's total revenue minus the opportunity cost of its resources. (Total revenue minus explicit and implicit costs) It is usually less than the accounting profit

Implicit cost of capital

The opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way

Normal profit

An economic profit equal to zero is also known as this. It is an economic profit just high enough to keep a firm engaged in its current activity.

Principle of marginal analysis

According to this, every activity should continue until marginal benefit equals marginal cost.

Marginal revenue

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

Optimal output rule

Says that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost

Marginal cost curve

Shows how the cost of producing one more unit depends on the quantity that has already been produced

Marginal revenue curve

Shows how marginal revenue varies as output varies

Production function

The relationship between the quantity of inputs a firm uses and the quantity of output it produces

Fixed input

An input whose quantity is fixed for a period of time and cannot be vaired

Variable input

An input whose quantity the firm can vary at any time

Long run

The time period in which all inputs can be varied

Short run

The time period in which at least one input is fixed

Total product curve

shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input

Marginal product

Of an input is the additional quantity of output produced by using one more unit of that input

Diminishing returns to an input

These occur when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input

Fixed cost

A cost that does not depend on the quantity of output produced. It is the cost of the fixed input

Variable cost

A cost that depends on the quantity of output produced. It is the cost of the variable input

Total cost

Of producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output

Total cost curve

Shows how total cost depends on the quantity of output

Average total cost

Total cost divided by quantity of output produced

Average cost

Average total cost is often referred to simply as this

U-shaped average total cost curve

Falls at low levels of output and then rises at higher levels

Average fixed cost

The fixed cost per unit of output

Average variable cost

The variable cost per unit of output

Minimum-cost output

The quantity of output at which average total cost is lowest—it correspond to the bottom of the U-shaped average total cost curve.

Average product

Of an input is the total product divided by the quantity of the input; output per unit of input

Average product curve

For an input shows the relationship between the average product and the quantity of the input

Long-run average total cost curve

Shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output

Economies of scale

These occur when long-run average total cost declines as output increases

Increasing returns to scale

These occur when output increases more than in proportion to an increase in all inputs. For example, with these, doubling all inputs would cause output to more than double.

Diseconomies of scale

These occur when long-run average total cost increases as output increases

Decreasing returns to scale

These occur when output increases less than in proportion to an increase in all inputs

Constant returns to scale

These occur when output increases directly in proportion to an increase in all inputs. The long-run average total cost is as low as it can get.

Sunk cost

A cost that has already been incurred and is nonrecoverable. This cost should be ignored in a decision about future actions.

Price-taking firm

A firm whose actions have no effect on the market price of the good or service it sells

Price-taking consumer

A consumer whose actions have no effect on the market price of the good or service he or she buys

Perfectly competitive market

A market in which all market participants are price-takers

Perfectly competitive industry

An industry in which firms are price-takers

Market share

A firm's ______ ______ is the fraction of the total industry output accounted for by that firm's output

Standard product

Describes a good when consumers regard the products of different firms as the same good

Commodity

Describes a good when consumers regard the products of different firms as the same good

Free entry and exit

An industry has this when new firms can easily enter into the industry and existing firms can easily leave the industry

Monopolist

The only producer of a good that has no close substitutes

Monopoly

An industry controlled by a monopolist

Barrier to entry

To earn economic profits, a monopolist must be protected by this—something that prevents other firms from entering the industry.

Natural monopoly

Exists when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output

Patent

Gives an inventor a temporary monopoly in the use or sale of an invention

Copyright

Gives the creator of a literary or artistic work the sole right to profit from that work for a specified period of time

Oligopoly

An industry with only a small number of firms

Oligopolist

A producer in an oligopoly

Imperfect competition

When no one firm has a monopoly, but producers nonetheless realize that they can affect market prices, an industry is characterized by:

Concentration ratios

Measure the percentage of industry sales accounted for by the "X" largest firms, for example the four-firm or the eight firm versions of this

Herfindahl-Hirschman Index

The square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure.

Monopolistic competition

A market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run

Price-taking firm's optimal output rule

Says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced

Break-even price

Of a price-taking firm is the market price at which it earns zero profit

Shut-down price

A firm will cease production in the short run if the market price falls below this, which is equal to minimum average variable cost

Short-run individual supply curve

Shows how an individual firm's profit-maximizing level of output depends on the market price, taking fixed cost as given. Equal to marginal cost above average variable cost.

Industry supply curve

Shows the relationship between the price of a good and the total output of the industry as a whole

Short-run industry supply curve

Shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms

Short-run market equilibrium

This occurs when the quantity supplied equals the quantity demanded, taking the number of producers as given

Long-run market equilibrium

A market is in this when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur. Firms make normal profit.

Long-run industry supply curve

Shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry

Constant-cost industry

An industry with a horizontal (perfectly elastic) long-run supply curve

Increasing-cost industry

An industry with an upward-sloping long-run supply curve

Decreasing-cost industry

An industry with a downward-sloping long-run supply curve

Accounting costs

Explicit costs

Economic costs

Explicit and implicit costs

Total revenue

Price x quantity

Total profit

Total revenue - total costs

Law of diminishing marginal returns

As variable resources are added to fixed resources, the additional output produced from each new worker will eventually fall

Total physical product

Total output or quantity produced

Increasing marginal returns

Stage 1 of returns when marginal product rises and total product increases at an increasing rate due to specialization

Decreasing marginal returns

Stage 2 of returns when marginal product falls and total product increases at a decreasing rate because of each worker adding less and less to fixed resources

Negative marginal returns

Stage 3 of returns when marginal product is negative and total product decreases because workers get in each other's way

Production

Converting inputs into output

Geographic monopoly

A monopoly based on the absence of other sellers in a certain geographic area

Marginal revenue = demand = average revenue = price

What is illustrated by the perfectly elastic demand curve for each perfectly competitive firm?

Shut-down rule

A firm should continue to produce as long as the price is above the AVC. When the price falls below AVC then the firm should minimize its losses by shutting down.

Enter

Firms will do this in the long run if there is profit in the short run

Exit

Firms will do this in the long run if there is loss in the short run.

Productive efficiency

The production of a good in a least costly way. (Minimum amount of resources are being used). Price = Minimum average total cost

Allocative Efficiency

Producers are allocating resources to make the products most wanted by society. Price = Marginal Cost

Inverse

The marginal cost curve and the marginal product curve have a(n) _______ relationship.