AP Microeconomics Unit 3

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)

Explicit Cost

Explicit Cost

a cost that involves actually laying out money.

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.

Accounting Profit

a business’s total revenue minus the explicit cost and depreciation

Economic Profit

a business’s total revenue minus the opportunity cost of its resources; usually less than the accounting profit.

Normal Profit

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

Marginal Analysis

the study of the costs and benefits of doing a little bit more of an activity versus a little bit less.

Marginal Revenue (Curve)

the change in total revenue generated by an additional unit of output; curve shows how it varies as output changes

Production Function

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

Fixed Cost (FC)

a cost that does not depend on the quantity of output produced; the cost of the fixed input.

Variable Cost (VC)

a cost that depends on the quantity of output produced; the cost of the variable input.

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.

Marginal Product

the additional quantity of output produced by using one more unit of an input.

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.

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

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

Average Fixed Cost (Curve)

the fixed cost per unit of output; curve shows how it changes with quantity of output

Average Variable Cost (Curve)

the variable cost per unit of output; curve shows how it changes with output

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.

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.

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

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; for example, doubling all inputs would cause output to more than double.

Diseconomies of Scale

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

Decreasing Returns to Scale

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

Constant Returns to Scale

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

Price-Taking

When somebody has no effect on the market price of the good or service they buy/sell

Perfectly Competitive Market

a market in which all market participants are price takers.

Standardized Product

describes a good produced by different firms, but that consumers regard as the same good; also known as a commodity.

Free Entry and Exit

when new firms can easily enter into an industry and existing firms can easily leave that industry.

Monopoly

an industry controlled by a monopolist, the only producer of a good that has no close substitutes.

Barrier to Entry

protects a monopolist (and allows it to persist and earn economic profits) by preventing other firms from entering the industry.

Natural Monopoly

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

Oligopoly

an industry with only a small number of firms.

Imperfect Competition

industry in which no one firm has a monopoly, but producers nonetheless realize that they can affect market prices.

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.

Break-Even Price

the market price at which a price-taking firm earns zero profit; the minimum average total cost of such a firm.

Shut-Down Price

the price at which a firm ceases production in the short run; equal to minimum average variable cost.

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.

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.

Short-Run Market Equilibrium

when the quantity supplied equals the quantity demanded and the number of firms in the market is fixed.

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.

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.

Productive Efficiency

achieved by an economy if it produces at a point on its production possibilities curve.

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

Increasing-Cost Industry

an industry with an upward-sloping long-run supply curve; the firms’ production costs increase with the size of the industry.

Decreasing-Cost Industry

an industry with a downward-sloping long-run supply curve; the firms’ production costs decrease as the industry grows.