AP Microeconomics Unit 3

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Explicit Cost

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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)

47 Terms

1

Explicit Cost

a cost that involves actually laying out money.

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2

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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3

Accounting Profit

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

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4

Economic Profit

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

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5

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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6

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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7

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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8

Production Function

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

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9

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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10

Variable Cost (VC)

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

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11

Long Run

the time period in which all inputs can be varied.

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12

Short Run

the time period in which at least one input is fixed.

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13

Marginal Product

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

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14

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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15

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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16

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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17

Average Fixed Cost (Curve)

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

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18

Average Variable Cost (Curve)

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

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19

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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20

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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21

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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22

Economies of Scale

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

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23

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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24

Diseconomies of Scale

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

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25

Decreasing Returns to Scale

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

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26

Constant Returns to Scale

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

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27

Price-Taking

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

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28

Perfectly Competitive Market

a market in which all market participants are price takers.

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29

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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30

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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31

Monopoly

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

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32

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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33

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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34

Oligopoly

an industry with only a small number of firms.

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35

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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36

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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37

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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38

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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39

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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40

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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41

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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42

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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43

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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44

Productive Efficiency

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

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45

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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46

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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47

Decreasing-Cost Industry

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

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