AP MIRCOECONOMICS UNIT 3 VOCAB

Explicit cost

A cost that involves actually laying out money.

Explicit cost Example

A college student has to pay $10,000 for tuition in her first year of college.

Implicit cost

Does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone.

Implicit cost Example

Someone who goes to college instead of working would lose $15,000 in salary if she worked.

Accounting profit

The business’s total revenue minus the explicit cost and depreciation.

Accounting profit Example

If Tesla sells 400 cars for $100,000 each, then they earn a total revenue of $40,000,000, and if the total cost of producing the cars is $20,000,000, then they earn a profit of $20,000,000.

Economic profit

The business’s total revenue minus the opportunity cost of its resources. It is usually less than the accounting profit.

Economic profit Example

Berky starts a business and has a startup cost of $500,000; during the first year, she makes a revenue of $700,000 however, if she stayed at her previous job, she would have made $45,000 if the revenue is subtracted by the opportunity it would give a profit of $155,000.

Normal profit

An economic profit just high enough to keep a firm engaged in its current activity (economic profit equal to zero).

Normal profit Example

If total revenue is $50,000 and the total explicit and implicit costs are also $50,000, then the economic profit is zero.

Optimal output rule

Profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced equals its marginal cost.

Optimal output rule Example

Brickly and Tickly should buy 5 clogs because at 6 clogs the marginal cost would begin to exceed marginal revenue.

Production function

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

Production function Example

A firm can produce 5 clogs for every 5 people the firm employs.

Fix cost

Does not depend on the quantity of output produced. Aka stays constant

Fix cost Example

The rent of a house is $4,000 a month.

Variable cost

Depends on the quantity of output produced. It is the cost of the variable input.

Variable cost Example

Each butter knife costs $5.00; if Ryanola wants to purchase 10, she will pay $50.00.

Total cost

The sum of the fixed cost and the variable cost.

Total cost Example

If Ryanole pays rent of her house, which is $4,000 a month and buys 10 butter knives that are $5.00 each, making it $50. Her cost in all will be $4,050.

Short run costs

The time period in which at least one input is fixed

Short run costs Example

A farmer owns a rice factory and is constrained to twenty-five acres of land, and even when he is not producing rice, he still has to pay for the land.

Long run costs

The time period in which all inputs can be varied

Long run costs Example

A farmer can rent more acres of land and grow more rice.

Minimum-cost output

The quantity of output at which average total cost is lowest–it corresponds to the bottom of the U-shaped average total cost curve (bottom of the U-shaped ATC curve).

Minimum-cost output Example

At a quantity of 2 bags of chips, the ATC curve is $50, and the MC is $50, too, so they intersect.

Economies of scale

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

Economies of scale Example

Specialization like producing cars which involve many different stages, so you have to split up the process and have workers specialize in different parts, making it more efficient to have a large output.

Diseconomies of scale

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

Diseconomies of scale Example

A product is made up of two products, thing 1 and thing 2; however, thing 2 is produced at a slower rate than thing 1, causing the company to slow the production rate of thing 1, increasing the cost per unit.

Constant returns to scale

When output increases directly in proportion to an increase in all inputs

Constant returns to scale Example

The factors of production are doubled, and the output also doubles as a result.

Sunk cost

A cost that has already been incurred and is nonrecoverable. A cost that should be ignored in a decision about future actions

Sunk cost Example

If you have already spent $100 on new tires only to find out that the problem is not fixed, that is unrecoverable $100; however, it does not affect what you do next.

Price taker

A firm/consumer's actions have no effect on the market price of the good or service it sells/buys.

(the consumer has complete control over the price and the firm must sell their good at the market price, the firm can only control the quantity they produce)

Price taker Example

Brittany goes shopping in a supermarket but can’t bargain with the supermarket to ask for discounts, unlike if she goes to a pop-up market.

Perfectly competitive market

A market in which all market participants are price takers.

Perfectly competitive market Example

The rice market has many firms that sell the same products and take the market price as given.

Standardized products

(commodity) when consumers regard the products of different firms as the same good

Standardized products Example

Consumers can't tell the difference between bushels of wheat even though they are produced by different farmers

Free entry and exit

When new firms can easily enter into the industry and existing firms can easily leave the industry.

Free entry and exit Example

A small business sells homemade slime however they are not making much money in the industry so they decide to leave the industry for another.

Break even price

The market price at which a price taking firm earns zero profit

Break even price Example

It costs $20 to produce a good and sells for $20, so they make zero profit.

Shut down price

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

Shut down price Example

At $500 a shoe company stops producing because the company can not pay its workers.