AP Microeconomics Unit 3

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Production, Cost, and Perfect Competition ("**" means that there is an issue with the term/definition, such as one of them not being exactly in the text-book or the definition just being suspicious)

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47 Terms

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Explicit Cost
a cost that involves actually laying out money.
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Implicit Cost
a cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are foregone.
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Accounting Profit
a business’s total revenue minus the explicit cost and depreciation
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Economic Profit
a business’s total revenue minus the opportunity cost of its resources; usually less than the accounting profit.
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Normal Profit
an economic profit equal to zero; an economic profit just high enough to keep a firm engaged in its current activity.
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Marginal Analysis
the study of the costs and benefits of doing a little bit more of an activity versus a little bit less.
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Marginal Revenue (Curve)
the change in total revenue generated by an additional unit of output; curve shows how it varies as output changes
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Production Function
the relationship between the quantity of inputs a firm uses and the quantity of output it produces.
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Fixed Cost (FC)
a cost that does not depend on the quantity of output produced; the cost of the fixed input.
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Variable Cost (VC)
a cost that depends on the quantity of output produced; the cost of the variable input.
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Long Run
the time period in which all inputs can be varied.
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Short Run
the time period in which at least one input is fixed.
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Marginal Product
the additional quantity of output produced by using one more unit of an input.
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Law of Diminishing Marginal Returns
law that states that an increase in the quantity of an input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.
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Total Cost (Curve)
the sum of the fixed cost and the variable cost of producing a given quantity of output; curve shows how it changes with quantity of output
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Average Total Cost (Curve)
total cost divided by quantity of output produced; also known as average cost; curve shows how it changes with quantity of output
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Average Fixed Cost (Curve)
the fixed cost per unit of output; curve shows how it changes with quantity of output
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Average Variable Cost (Curve)
the variable cost per unit of output; curve shows how it changes with output
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Minimum-Cost Output
the quantity of output at which average total cost is lowest; corresponds to the bottom of the U-shaped average total cost curve.
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Average Product (Curve)
the total product divided by the quantity of an input; curve shows the relationship between it and the quantity of an input.
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Long-run Average Total Cost (Curve)
average total cost when fixed cost has been chosen to minimize average total cost for each level of output; curve shows the relationship between output and average total cost
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Economies of Scale
when long-run average total cost declines as output increases.
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Increasing Returns to Scale
when output increases more than in proportion to an increase in all inputs; for example, doubling all inputs would cause output to more than double.
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Diseconomies of Scale
when long-run average total cost increases as output increases.
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Decreasing Returns to Scale
when output increases less than in proportion to an increase in all inputs.
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Constant Returns to Scale
when output increases directly in proportion to an increase in all inputs.
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Price-Taking
When somebody has no effect on the market price of the good or service they buy/sell
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Perfectly Competitive Market
a market in which all market participants are price takers.
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Standardized Product
describes a good produced by different firms, but that consumers regard as the same good; also known as a commodity.
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Free Entry and Exit
when new firms can easily enter into an industry and existing firms can easily leave that industry.
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Monopoly
an industry controlled by a monopolist, the only producer of a good that has no close substitutes.
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Barrier to Entry
protects a monopolist (and allows it to persist and earn economic profits) by preventing other firms from entering the industry.
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Natural Monopoly
when economies of scale provide a large cost advantage to a single firm that produces all of an industry’s output.
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Oligopoly
an industry with only a small number of firms.
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Imperfect Competition
industry in which no one firm has a monopoly, but producers nonetheless realize that they can affect market prices.
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Monopolistic Competition
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.
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Break-Even Price
the market price at which a price-taking firm earns zero profit; the minimum average total cost of such a firm.
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Shut-Down Price
the price at which a firm ceases production in the short run; equal to minimum average variable cost.
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Short-Run Individual Supply Curve
curve that shows how an individual firm’s profit-maximizing level of output depends on the market price, taking the fixed cost as given.
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Industry Supply Curve
curve that shows the relationship between the price of a good and the total output of the industry as a whole; also known as market supply curve.
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Short-Run Market Equilibrium
when the quantity supplied equals the quantity demanded and the number of firms in the market is fixed.
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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.
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Allocative Efficiency
achieved by an economy if it produces at the point along its production possibilities curve that makes consumers as well off as possible.
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Productive Efficiency
achieved by an economy if it produces at a point on its production possibilities curve.
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Constant-Cost Industry
an industry with a horizontal (perfectly elastic) long-run supply curve; the firms’ cost curves are unaffected by changes in the size of the industry
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Increasing-Cost Industry
an industry with an upward-sloping long-run supply curve; the firms’ production costs increase with the size of the industry.
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Decreasing-Cost Industry
an industry with a downward-sloping long-run supply curve; the firms’ production costs decrease as the industry grows.