AP Micro - Unit 3

AVC =

= TVC/Quantity

AFC =

= TFC/Quantity

ATC =

= AFC + AVC

MC =

= Change in TC/Change in Quantity

TC =

= TFC + TVC

MP =

= Change in TP/ Change in Labor (Input)

Explicit Costs

Expenditure costs (EX: rent, salaries, and utilities)

Implicit Costs

Includes non-expenditure costs (EX: normal profit, compensation for entrepreneurial talents, and lost wages from an alternative job)

Normal Profit

A firm’s total revenue covers its implicit and explicit costs but no money is left over

Economic Profit

A firm’s total revenue exceeds its costs

Accounting Profit =

= total revenue - explicit costs

Short Run

Fixed plant size results in both fixed and variable costs

Long Run

Variable plant size results in variable costs (no fixed costs)

Total Product

The collective amount of goods or services produced as inputs are varied

Marginal Product

The additional amount of good or service produced when one more unit of input is added

Law of Diminishing Returns

* as successive units of a variable input are added to a fixed input, beyond some point the marginal product declines
* marginal product is declining but still positive (stage II)

Fixed Costs

These costs do not change as the output changes

Variable Costs

These costs change as the output changes

Total Costs

The collective amount a firm must pay to produce a specified number of goods or services

Average Variable Costs

The per unit variable cost a firm will incur when producing at a specified output level

Average Total Costs

The overall per unit cost associated with a firm producing at a particular output level

Marginal Cost

The additional cost associated with producing one additional unit of a good or service

Economies of Scale

* Part of long-run ATC curve that is falling
* As output increases, AC decreases
* Caused by high fixed costs

Diseconomies of Scale

* Part of long-run ATC curve that is rising
* As output increases, AC increases

Constant Returns of Scale

* The horizontal range of long-run average total cost where LRAC is constant over a variety of plant sizes
* At the most efficient returns portion of the long run ATC curve

MES

Lowest point on the long run ATC curve

Perfect Competition

* Price takers (no market power)
* many buyers/sellers
* Identical products
* No barriers to entry/exit
* Normal (zero) long-run profit
* MR=D=AR=P

Pure Monopoly

* One firm
* Market power (can affect the price)
* High barriers to entry (hard for competing firms to enter the market)
* Can sustain a positive economic profit in the long-run

Monopolistic Competition

Many firms that sell **differentiated** products

Oligopoly

Three or four firms that control **70-80%** of the **market** **share**

Price Takers

Firms in a **purely competitive market** are referred to as this because they cannot influence industry prices

Average Revenue

Equals demand

Total Revenue

Price x Quantity Sold

Marginal Revenue

The additional revenue a firm receives when output is increased

Break-Even Point

Where price equals the ATC curve

MR=MC Rule

Profit maximization or loss minimization output determinate

Constant Cost Industry

Resource prices remain constant as a firm increases or decreases its output

Productive Efficiency

Operating at an output level that intersects the lowest point on the ATC curve

Allocative Efficiency

Ooperating at an output level where P (or D)=MC

Natural Monopoly

This is a firm that experiences significant economies of scale and therefore becomes a regulated monopoly

Barriers to Entry

Patents, trademarks, copyrights, high start-up costs, or significant economies of scale; it is most difficult for a new firm to enter a monopoly market structure

Price Discrimination

Charging each customer the maximum he or she is willing to pay for a good or service

Four Firm Concentration Ration

The % of the market controlled by the largest firms

Herfindahl Index

Control of market share firms have, squared and added together

Game-Theory Model

Pricing and profit strategy firms in an oligopoly compete in; know dominate strategy and Nash equilibrium

Collusion

Ologopolists working together to act like a monopoly; goal is to make more profit

Cartel

Overtly anti-competitive oligopoly

Total Cost/ Total Revenue Approach

TR - TC = Profit

Perfectly Price Discriminating Monopoly

Type of monopoly that maximizes total profit by charging each customer a price that matches his or her benefit received; price differences do not reflect any cost differences; be able to find total revenue and profit on this model

Profit Payoff Matrix

Used to examine game theory among oligopolists

Economic Profit

Add all MRs to equal total revenue and add all MCs to equal total costs; subtract TC from TR to find economic profit

Shut Down Rule

A firm should shut down in the short run if P is less than AVC; firms should shut down in the long run if P is less than ATC

Cost Tables

Be able to calculate output and profit/loss for perfect and imperfectly competitive firms; completed tables will be given to you for multiple choice test