AP Microeconomics Unit 4: Perfect and Imperfect Competition in Markets (3.1-3.7)

this is long sorry (not done)

production

input → output

What do firms have to do to earn profit?

make products (output)

input

resources used in the production process

• also called factors

total physical product (TP)

total output or quantity produced

marginal product (MP)

the additional output generated by additional inputs

marginal product (MP) examples

additional workers, machines, etc

marginal product (MP) formula

change in total product (TP) / change in inputs

average product (AP)

the output per unit of iutput

average product (AP) formula

total product / units of labor

fixed resources

resources that don’t change with the quantity produced

fixed resources examples

table, scissors, stapler

variable resouces

resources that do change with the quantity produced

variable resouces examples

workers, paper, staples

law of diminishing marginal returns

as variable resources are added to fixed resoucres the additional output from each additional worker will eventually fall

law of diminishing marginal returns example

if a farmer uses fertilizer, this will benefit the crops and increase output. Adding even more fertilizer can also increase output. However, after the third unit of fertilizer is added, the diminishing marginal return becomes less starting with the fourth unit

3 Stages of Returns

1.) Increasing Marginal Returns

2.) Decreasing Marginal Returns

3.) Negative Marginal Returns

Stage 1: Increasing Marginal Returns

MP ↑, TP ↑ at an increasing rate (graph is in the green)

• specialization

specialization

individuals, businesses, or countries focus on producing specific goods or tasks they do best, rather than everything, to become more efficient, productive, and skilled, ultimately leading to more output and economic growth

• 2 heads are better than oney

Stage 2: Decreasing Marginal Returns

MP ↓ TP ↑ at an decreasing rate (graph is in the yellow)

• fixed resources

Stage 3: Negative Marginal Returns

MP ↓ TP ↓ (graph is in the red)

• too much workers

When total utility is at it’s maximum, marginal utility is…

equal to zero

short run

a period in which one resource is fixed, the firm’s production process cannot be changed

• plant size is not changable

long run

ALL resources are variable

• no fixed resources

• plane capacity/size is changable

FC

total fixed costs

VC

total variable costs

TC

total costs

AFC

average fixed costs

AVC

average variable costs

ATC

average total costs

MC

marginal costs (supply curve)

fixed cost (FC)

costs for fixed resources that don’t change with the amount produced

FC examples

rent, manager salaries, insurance

AFC formula

fixed costs (FC) / quanitity

variable costs

cost for variable resouces that do change as more or less is produced

VC example

labor, electricity, raw materials

AVC formula

varibale cost (VC) / quantity

total costs

FC + VC

ATC forumla

• total costs (TC) / quantity

• average variable cost (AVC) / average fixed cost (AFC)

marginal costs (MC)

additonal costs of an additional output

MC formula

change in total costs / change in quanity

What is the relationship between the average total cost curve and the marginal cost curve in the short run?

When the average total cost curve is rising, the marginal cost curve is above the average total cost curve

What can cause a firms cost curve to shift upward?

Increase in wages

How are marginal product (MP) and marginal cost (MC) related?

They are mirror images of each other

Why does marginal cost always go down then up? (U-shaped)

Additional cost they produce fall when marginal product (MP) goes up

• eventually increase when additional workers produce less and less output

• diminishing marginal returns

What does marginal product always go up then down?

when more workers are hired, marginal product (MP) increases and eventually decreases because of the law of diminishing marginal returns

Why does the ATC go down the up?

• when marginal cost is below the average, the average goes down

• when the marginal cost is above the average, the average goes up

Where does the MC curve intersect with ATC’s curve?

At ATC’s lowest point

If a firm’s average total cost decreases as the firm increases its output, the firms marginal cost is…

Less than the average cost

• ATC goes down when MC goes down

As outputs increases, a firms short run marginal cost will event increase because of…

diminishing returns

What happenes if the variable costs change?

MC, AVC, and ATC also change!

In the short run, what is true of the firms average total cost of production?

It is equal to average fixed cost plus berate variable cost

What is long run production used for?

• planning for firms to identify which size factory results in the lowest unit cost

Increasing Returns to Scale

>2:1 ratio of production

• when your output more than doubles

Constant returns to scale

1:1 ratio of production

• if your output doubles

• the long run average total is as low as it can get

Decreasing Returns to Scale

<2:1 ratio of production

• if your output less than doubles

Returns to Scale

Only looks at production, not costs

Why do economies of scale occur?

• firms that produce more can use mass production techniques and specialization

Economies of scale

Long run average cost falls because mass production techniques are used

total revenue (TR)

price x qty.

profit

total revenue (TR) - Total cost (TC)

total cost (TC)

P/L/E (profit/loss/breaking even)

explicit costs

(out of pocket costs) payments made by firms for using the resources of others

• what only accountants look at

accountant profit

total revenue (TR) - accounting costs (explicit)

explicit costs example

rent, wages, wages, materials, electricity bill

implicit costs

opportunity cost that firms pay for using their own resources

• what economists examine (+ explicit)

economic profit

total revenue (TR) - economic costs (explicit + implicit)

implict cost examples

time, forgone wage/rent

What is the goal for every business?

to maximize profit

profit maximizing rule

MR = MC

Shut Down Rule

• a firm should continue producing as long as the price (P) is above the AVC

• when the price falls below the AVC, the firm should minimize their losses and shut down (the firm will have a loss bigger than their fixed cost

the short run supply curve