Unit 3 Test Outline: Cost Curves, Profit, and Perfect Competition (Modules 52-60)

Profit Definition

Profit is calculated as Total Revenue (TR) minus Total Cost (TC).

Explicit Costs

Money payments made by a firm that are accounted as explicit costs.

Implicit Costs

The opportunities given up that are considered when determining total cost.

Positive Economic Profit

Occurs when total revenue exceeds both explicit and implicit costs.

Normal Profit

Occurs when total revenue equals total costs, resulting in an economic profit of zero.

Profit Maximization

Occurs when marginal revenue equals marginal cost (MR = MC).

Total Product (TP)

The total output a firm produces with a given amount of inputs.

Average Product (AP)

The output per unit of input, calculated as total product divided by the number of inputs used.

Marginal Product (MP)

The additional output generated by adding one more unit of an input.

Total Costs

The sum of fixed costs and variable costs.

Fixed Costs

Costs that do not vary with production level, such as rent or salaries.

Variable Costs

Costs that change with the level of output, including material and labor costs.

Marginal Cost (MC)

The additional cost incurred when producing one more unit of a good.

Average Total Cost (ATC)

Calculated as total cost divided by quantity produced.

Economies of Scale

Cost advantages reaped by firms when production becomes efficient, as fixed costs are spread over a larger number of goods.

Allocative Efficiency

Achieved when the price equals the marginal cost (P = MC), leading to optimal resource allocation.

Productive Efficiency

Achieved when the price equals the minimum average total cost (P = minimum ATC).

Perfect Competition Characteristics

Includes many producers, identical products, easy entry or exit, and no price control.

Price Takers

Firms in perfect competition that cannot set prices but must accept the market price.

Short-run Economic Profit

Occurs if a firm’s profit-maximizing quantity is above its average total cost (ATC).

Shutdown Point

The level of output where price falls below average variable cost (AVC), prompting a firm to cease operations.

Long-run Equilibrium in Perfect Competition

In the long-run, firms achieve normal profit where price equals minimum ATC.

MC Curve and ATC Curve Relationship

The marginal cost curve crosses the average total cost curve at its minimum point.