AP Microeconomics Chapters 9, 10, 11, 12

Economic Cost

Economic Cost

the payment that must be made to obtain and retain the services of a resource.

Explicit Cost

the monetary payments a firm makes to those from whom it must purchase resources that it does not own.

Implicit Cost

the opportunity cost of using the resources that it already owns to makes the firm's own product rather that selling those resources to outsiders for cash.

Accounting Profit

the profit number that accountants calculate by subtracting total explicit cost from total sales revenue. A.K.A "Net Income"

Economic Profit

is the result of subtracting all of your economic costs - both explicit costs and implicit costs - form revenue.

Normal Profit

the level of accounting profit at which a firm generates an economic profit of zero after paying for entrepreneurial ability.

Short Run

is a period of time to brief for a firm to alter its capacity , yet long enough to permit a change in the degree to which the plant's current capacity is used.

Long Run

is a period long enough for a firm to adjust the quantities of all the resources it employs, including plant capacity.

Total Product (TP)

is the total quantity, or total output, of a particular good or service produced.

Marginal Product (MP)

is the extra output or added product associated with adding a unit of a variable resource, ex. labor.

Average Product (AP)

also called labor productivity, is output per unit of labor input.

Economic Profit

Revenue - (Explicit costs + implicit costs) = ?

Economic Cost

explicit costs + implicit costs = ?

Accounting Profit

Revenue - explicit costs = ?

Law of Diminishing Returns

It states that as successive units of a variable resource (labor) are added to a fixed resource (capital or land), beyond some point the extra, or marginal, product that can be attributed to each additional unit of the variable resource will decline.

Fixed Cost (TFC)

are those costs that do not vary with changes in output.

Fixed Cost

Rental payments, interest on a firm's debt, a portion of depreciation on equipment and buildings, and insurance premiums.

Total Variable Cost (TVC)

are those costs that change with the level of output.

Variable Cost

payments for materials, fuel, power, transportation services, and most labor.

Total Cost

is the sum of fixed costs and variable costs at each level of output.

Total Cost

TFC + TVC = ?

AFC Average Fixed Cost

for any output level is found by dividing TFC by that amount of output (Q)

AFC

TFC ÷ Q

Normal Profit

The opportunity cost of other ventures

Short Run

Can’t change plant capacity, but can change degree to which it’s used

Long Run

Can change both plant capacity and resource employment

Marginal Cost

Total Cost (TC) / the quantity produced

Economies of Scale

When ATC decreases in LR as size and output increase

Diseconomies of Scale

When ATC increases in LR as size and output increase

Constant Returns to Scale

Firm’s ATC is unchanged as size of plant varies

Minimum Efficient Scale (MES)

The lowest level of output a firm can produce to minimize LR ATC

Natural Monopoly

ATC is minimized when one firm is producing a particular good or service

Pure Competition

Large # of firms, standardized (homogenous) products, easy entry/exit, must accept market price

Pure Monopoly

One firm is sole seller, blocked entry, single, unique product, firm has total control of price

Monopolistic Competition

Relatively large # of producers, differentiated products (books, clothing, furniture), nonprice competition, easy entry/exit, some but not total control of price

Nonprice Competition

Products are distinguished by design and workmanship (product differentiation)

Oligopoly

Smaller # of sellers, few differentiated products, each firm affected by rival’s decisions, determines own price and output

Imperfect Competition

Any market model that’s not Perfect Competition

“Price Takers”

Firms have no control over market price

Perfectly Inelastic Demand

Demand for an individual firm in a PC market

TR-TC Approach to Profit Maximization

Where TR>TC at the maximum amount (greatest difference between them)

MR-MC Approach to Profit Maximization

Firm will maximize profit where MR = MC

Shutdown Case

When P < AVC

Equilibrium Price in PC Industry

Total QS = Total QD

Fallacy of Composition

what’s true for the part isn’t always true for the whole