AP Micro Unit 3

Accounting profit

total revenue minus total cost, including only explicit costs

Barriers to entry

Conditions that keep new businesses either from entering an industry or succeeding in that industry.

Commodity

An item of trade or commerce, especially an agricultural or a mining product; something valuable, useful. A product that is the same no matter who produces it.

Diminishing marginal returns

Decreasing satisfaction or usefulness as additional units of a product are acquired (your desire for a product decreases as you consume more)

Economic profit

Total revenue minus total cost, including both explicit and implicit costs.

Exit

A long-run decision to leave the market

Explicit costs

Input costs that require an outlay of money by the firm

Fixed Costs

Costs that do not vary with the quantity of output produced

Implicit costs

Input costs that do not require an outlay of money by the firm. Opportunity cost of a firm, such as time, and forgone income.

Marginal

A small change, one more or one less

Marginal costs

The change in total cost that comes from making, consuming or producing one additional item.

Marginal production

Extra output due to the addtion of one more unit of input

Marginal revenue

Extra revenue from the sale of one additional unit of output

Market

A market is one of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange.

Normal Profit

When economic profit is equal to zero; this occurs when the difference between total revenue and total cost (explicit and implicit costs) equals zero. Normal profit is different than accounting profit because opportunity cost is taken into consideration.

Perfectly competitive market

A market structure in which the following five criteria are met:1) All firms sell an identical product;2) All firms are price takers - they cannot control the market price of their product;3) All firms have a relatively small market share;4) Buyers have complete information about the product being sold and the prices charged by each firm; and5) The industry is characterized by freedom of entry and exit.Perfect competition is sometimes referred to as "pure competition".

Price discrimination

Division of customers into groups based on how much they will pay for a good

Price searcher

A seller that has the ability to control to some degree the price of the product it sells

Price taker

A buyer or seller that takes the market price as given

Profit

(TR-TC= Profit): A financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something

Profit Maximization

Refers to a firm earning as much sales revenue as possible while, at the same time, keeping costs to a minimum. Profit maximisation is the most common goal for a firm. Occurs at the quantity of output where MR=MC

Shut down

Short term decision to stop production, but not closing (exit).

Sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Total cost

(FC + VC = TC); Total cost refers to the total expense incurred in reaching a particular level of output

Total revenue

(P x Q = TR) the amount a firm receives for the sale of its output

Variable costs

Costs that change as output changes