AP Microeconomics: Unit 3 Terms - Definitions
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59 Terms
Money you actually pay out for something (like wages or rent); A direct payment made to others for resources used in production; out-of-pocket expenses.
The cost of using something you already own (like your time or your own building); The opportunity cost of using resources owned by the firm; income forgone by not using those resources in their best alternative use.
Money you have left after paying bills (but doesn't count the cost of using your own stuff); Total revenue minus explicit costs; does not consider implicit costs.
Money you have left after paying bills and counting the cost of using your own stuff; Total revenue minus both explicit and implicit costs; reflects true profitability by considering all opportunity costs.
The money you could have made if you invested your money somewhere else instead of in your business; The opportunity cost of using a firm's own capital; income forgone by not investing capital elsewhere.
The minimum amount of profit you need to keep your business going (covers all costs); The minimum profit necessary to keep a firm in business in the long run; equal to zero economic profit.
Decide if doing one more thing is worth it by comparing the extra benefit to the extra cost; Decisions compare the marginal benefit of an action with its marginal cost; action taken if marginal benefit exceeds marginal cost.
The extra money you get from selling one more thing; The additional revenue generated by selling one more unit of output.
Make the amount where the extra money you get from selling one more thing equals the extra cost to make it; Produce the quantity of output where marginal revenue equals marginal cost; maximizes profit or minimizes loss.
A line showing how much it costs to make one more thing; Shows the change in total cost from producing one more unit of output; typically slopes upward due to diminishing returns.
A line showing how much extra money you get from selling one more thing; Shows the relationship between quantity sold and marginal revenue; in perfect competition, a horizontal line equal to market price.
How much stuff you can make with the things you use to make it; Shows the relationship between the quantity of inputs used and the quantity of output produced.
Something you can't change quickly (like the size of your factory); An input whose quantity cannot be changed in the short run.
Something you can change quickly (like the number of workers); An input whose quantity can be changed in the short run.
A time period where you can change everything; A period in which all inputs can be varied; no fixed inputs.
A time period where you can't change everything; A period in which at least one input is fixed.
A line showing how much you can make with different amounts of stuff; Shows the relationship between the quantity of a variable input and total output produced.
How much more you can make by adding one more worker (or whatever); The increase in output resulting from employing one more unit of a variable input.
Adding more and more workers eventually doesn't make as much extra stuff; As more of a variable input is added, the marginal product of that input eventually declines.
Costs that stay the same no matter how much you make (like rent); Costs that do not vary with the quantity of output produced in the short run.
Costs that change depending on how much you make (like materials); Costs that vary with the quantity of output produced.
All your costs added together (fixed and variable); The sum of fixed costs and variable costs.
A line showing how your total costs change as you make more stuff; Shows the relationship between the quantity of output produced and the total cost of production.
The cost to make one thing (total cost divided by how many you made); Total cost divided by quantity of output.
Same as average total cost; Cost per unit of output; often used interchangeably with ATC.
The cost per thing usually goes down at first, then up; ATC declines at low output levels, reaches a minimum, and then rises due to diminishing returns.
The fixed cost per thing (always goes down as you make more); Fixed cost divided by the quantity of output; always declines as output increases.
The variable cost per thing; Variable cost divided by the quantity of output.
The amount you should make to have the lowest cost per thing; The quantity of output at which average total cost is minimized.
How much each worker makes on average; Total output divided by the quantity of a variable input.
A line showing how much each worker makes on average; Shows the relationship between the quantity of a variable input and average product.
The lowest cost per thing you can get when you can change everything; Shows the relationship between output and average total cost when all inputs are variable.
Making more stuff makes the cost per thing go down; LRATC decreases as output increases; results from increasing inputs leading to more than proportional output increase.
Same as economies of scale.
The smallest you can be and still have the lowest cost per thing; The lowest output level at which a firm minimizes its LRATC.
Making too much stuff makes the cost per thing go up; LRATC increases as output increases; results from inputs leading to less than proportional output increases.
Same as diseconomies of scale; LRATC remains constant as output increases; inputs increase proportionally to output.
Money you've already spent and can't get back (don't worry about it); A cost that has already been incurred and cannot be recovered; should not affect future decisions.
A business that has to sell its stuff for whatever the market price is; A firm in a perfectly competitive market that cannot influence the market price; must accept the market price as given.
A buyer who has to pay whatever the market price is; A consumer who cannot influence market price; must accept the market price as given
A market with lots of buyers and sellers, where everyone sells the same thing; A market with many buyers and sellers, identical products, free entry and exit, and perfect information.
An industry where all the businesses are price takers; An industry where all firms are price takers, producing identical products, with free entry and exit.
How much of the total market your business controls; The percentage of total market output produced by a single firm.
All the products are the same (like wheat); Products that are identical or perfect substitutes.
A basic good that's the same no matter who sells it; A standardized product typically traded in bulk.
Businesses can easily start or stop selling in the market; Firms can enter or leave the market easily without significant barriers.
Something that makes it hard for new businesses to start in the market; Obstacles that make it difficult for new firms to enter a market
Sell the amount where the price equals the cost to make one more; Produce the quantity where price equals marginal cost; in perfect competition, MR equals MC.
The price where you make zero economic profit (just enough to cover costs); The price at which a firm earns zero economic profit.
The price where you're better off stopping production for a while; The price where a firm is indifferent between producing and shutting down in the short run.
A line showing how much a business will sell at different prices in the short run; The portion of the firm's marginal cost curve above the average variable cost curve.
A line showing how much all businesses in the market will sell at different prices; Shows the relationship between market price and total quantity supplied by all firms in the industry.
Same as above, but in the short run; The horizontal summation of all firms' short-run supply curves.
A situation where no businesses want to enter or leave the market; A situation where no tendency for firms to enter or exit; economic profit is zero.
A line showing how much all businesses will sell at different prices in the long run; Shows the relationship between market price and total quantity supplied in the long run
An industry where making more stuff doesn't change the cost of the things used to make it; An industry where input prices remain constant as output increases.
An industry where making more stuff makes the cost of the things used to make it go up; An industry where input prices increase as industry output increases.
An industry where making more stuff makes the cost of the things used to make it go down; An industry where input prices decrease as industry output increases.