Unit 3 AP Microeconomics

Total product

the number of units a firm can produce with given quantity of inputs

Marginal product

measures the additional output produced when one more worker is added

Diminishing marginal resources

when each additional worker contributes less and less output because of limited resourced or workspace

Negative marginal returns

adding more workers reduce total output

Average product + equation

how much each worker is producing or average AP= total product/ number of workers

Two types of costs

fixed costs

Marginal cost + equation

the change in total cost that results from producing one additional unit of good. MC= change in total cost/ change in quantity

Marginal cost

how much total cost increase when producing one more unit

Average fixed cost

fixed cost per unit, which decreases as production increases

Average variable cost, variable cost per unit, which first decrease, then increases

Average total cost

the sum of AFC and AVC, representing the total cost per unit

Production

refers to how efficiency resources (labor and ingredients) are converted to finished goods (cookies)

Costs

represents the expenses incurred in the process (wages, chocolate chips, flour)

Marginal product (MP)

refers to the additional output generated by adding one more unit of a resource like hiring one more worker.

Marginal cost (MC)

represents the additional cost incurred from producing one more unit of output, such as baking one more cookie

Average product AP

the average output produced per unit of resource (like per worker)

Average Variable Cost AVC

the average cost of the variable inputs (ingredients) hourly wages per unit of output

Cost 2 time frame: 

Short run: 

-some fixed costs are fixed (ex, stand) 

-increase production (more workers) 

-can’t expand physical space overnight 

Longrun: 

- everything is flexible

-all costs become variable 

-can expand to a bigger shop, invest in better equipment or even build factory 

Accounting profit formula

actual financial payments made from firm total revenue- explicit cost= accounting profit

Economies profit formula

include forgone wages, potential income, total revenue- (explicit + implicit)= economic profit

Normal profit (zero economic profit)

minimum level of profit required to keep in business, total revenue= total cost

Positive economic profit

business earning more than all its opportunity cost, ibusiness is best possible use of resources

Zero economic profit (normal profit)

business’s total revenue covers both explicit + implicit costs

Negative economic profit

suggests the firm could be better off by relocating resources elsewhere, inefficiency, exit the market

Economies of Scale

when firm increases its scale of production and average costs decline

Constant returns to scale

when a firm increases its scale at production and average costs being to rise

Total revenue + equation

amount of money a business earns from selling its product, TR= price x quantity

Profit maximization

profit maximization is where marginal revenue equals marginal cost

Key characteristics of perfect competition:

• Numbers of sellers: a perfectly competitive market consists of numerous sellers and buyers. 

• Homogenous products: firms in perfect competition sell products that consumers view as identical

• No pricing power: firms have absolutely no power to set prices, they must accept the market determined price. If single seller tries to raise price, consumer easily switch to another seller

• No barriers to entry or exit: entry and exit from the market are easy, with no significant barrier such as high start up cost or regulatory restriction

←potential vendor see firm earning short run profits, want to take advantage 

←vendors benign earning short-run losses, some will exit industry

Allocative efficiency

achieved because price equals marginal cost in both short and long runs. Resources are allocated efficiently reflecting consumer’s valuation of goods

Productive efficiency

achieved in the long runs as firms produce at the lowest possible average total cost precisely where ATC curves intersects the marginal cost

Average perspective

per unit production analyze cost + revenue, help see if each item they sell to answering its cost

Long run equilibrium

entry and exit of firms is complete- firms earn zero economic profit