ap microeconomics unit 3

what is production?

converting input into output

what are fixed resources?

resources that don’t change with the quantity produced

what are variable resources?

resources that do change with the quantity produced

what is the short run?

period of time too short for a firm to change its maximum potential level of production; at least one resource is fixed, plant/capacity size is NOT changeable

what is the long run?

period of time long enough for a firm to change its maximum potential level of production; all resources are variable, no fixed resources, plant/capacity size is changeable

input for short run

fixed input

input for long run

enough time to change input

what does a firm need to do to earn profit?

make products (output)

what are inputs

the resources used to make output

what are input resources also called

factors

what is total physical product (TP)

total output or quantity produced

what is marginal product

additional output generated by additional inputs (workers)

what is average product

output per unit of input

what is the formula for marginal product

change in total product / change in inputs

what is the formula for average product

total product / units of labor (# workers)

what is the law of diminishing marginal returns

as variable resources (workers) are added to fixed resources, additional output produced from each additional worker will eventually fall

what is stage one in graphing production

increasing marginal returns

what happens during the increasing marginal returns phase of a graph

MP rises, Tp increases at an increasing rate, all because of specialization

what is stage two in graphing production

decreasing marginal returns

what happens during the decreasing marginal returns phase of a graph

MP falls, TP increases at a decreasing rate, because of fixed resources; each worker adds less and less

what is stage three in graphing production

negative marginal returns

what happens during the negative marginal returns phase of a graph

MP is negative, TP decreases, all because workers get in each others’ way

what are the all of the economic total costs?

total fixed costs (FC), total variable costs (VC), total costs (TC)

what are all of the economic per unit costs?

average fixed costs (AFC), average variable costs (AVC), average total costs (ATC), marginal costs (MC)

fixed costs

costs for fixed resources that DON’T change with amount produced

what are some examples of fixed costs

rent, insurance, manager salaries

formula for average fixed costs

fixed cost / quantity

variable costs

costs for variable resources that DO change as more or less is produced

what are some examples of variable costs

raw materials, labor, electricity

what is the formula for average variable costs

variable costs / quantity

total cost

fixed cost + variable cost

average total cost

total cost / quantity OR average fixed cost + average variable cost

marginal cost

additional costs of each additional output

what are some examples of marginal costs

production of 2 more units of output increases cost from $100 → $120, MC is $10

what is the formula for marginal cost

change in cost / change in quantity

why is the MC curve U - shaped

because of diminishing marginal returns

why does the additional costs of the first units produced fall?

increasing marginal returns

what happens to the marginal cost as production increases?

it increases because each worker adds less and less

when does the MC curve intersect the ATC curve

at the ATC’s lowest point

what happens when the marginal cost is below average

pulls average down

what happens when marginal cost is above average

pulls average up

what is the long run used for

planning for firms to identify which size factory results in the lowest per unit cost

economies of scale

as production increases, long-run average total cost decreases

why do economies of scale occur?

firms that produce more can better use mass production techniques and specialization

why does long run average cost decrease in the economies of scale

mass production techniques are used

constant returns to scale

long run average cost is as low as it can get

diseconomies of scale

long run average costs increase as the firms get too big and difficult to manage

why doesn’t the law of diminishing marginal returns apply in the long run

there are no fixed resources

what is the profit formula

total revenue - total cost

what is the total revenue formula

price output x quantity sold

total cost

cost of all inputs used

implicit cost

a cost that is measured in the cost of forgone opportunities

explicit costs

a cost that requires paying out money

how are implicit costs related to opportunity costs

what is forgone when you choose one thing over another

opportunity cost

explicit cost + implicit cost

what is the accounting profit formula

business’s total revenue - explicit costs and depreciation

what is the economic profit formula

business’s total revenue - opportunity cost of its resources

why do businesses face implicit costs

they don’t use their capital in other ways, time + energy is devoted to the businesses

what does a positive economic profit indicate?

the person is better off/gaining from what they are already doing

what does a negative economic profit indicate

the person would be better off if they devoted their time and money somewhere else

normal profit

economic profit of zero

why would an economic profit of zero be a good thing

a firm would be gaining just enough to keep doing what they are doing and would not be better off doing something else

what will rational firms use to ensure profit marginalization?

marginal analysis

what is the goal of every business?

to maximize profit

what must a firm do in order to maximize profit

make the right output

when should firms continue to produce until

marginal revenue equals the marginal cost

how do firms maximize profit

setting quantity where marginal revenue equals marginal cost

marginal revenue

the change in total revenue generated by an additional unit of output

formula for marginal revenue

change in total revenue / change in quantity of output

what is the shut down rule

a firm should continue to produce as long as the price is above the AVC or TR > TVC

under what circumstances will firms still operate in the short run

price > AVC or their loss is less than their fixed cost

when should a firm shut down

when the price falls below AVC because the firms can’t produce if they don’t pay workers

why should a firm shut down if their price is below AVC

the firm has a loss that is bigger than their fixed costs

sunk cost

a cost that has already been incurred and cannot be recouped

what is important to remember about sunk costs?

ignore them and move forward

why do firms enter a market in the long run

if there are profit making opportunities

when will a firm exit a market

if they anticipate economic losses

barriers to entry

factors that prevent new firms from entering a given market

what does having low barriers generally entail for markets

more competition (many firms) individual firms make less profit

what does having high barriers generally entail for markets

less competition (few firms) and individual firms make more profit

example of firm with low barriers to entry

coffee shops

example of firm with high barriers to entry

car manufacturers

normal profit

in an efficient competitive market, firms that have identical products make this

what will firms do in the long run

firms enter to earn profit, so supply increases in the industry

constant cost industry

new firms entering the market does not increase the costs for firms already in the market

increasing cost industry

new firms enter the market increase costs for firms already in the market

what does the long run supply look like graphically in a constant cost industry

horizontal

what does the long run supply look like graphically in an increasing cost industry

upward sloping because the ATC increases

productive efficiency

producing at the lowest possible cost (minimum amount of resources used)

where is productive efficiency graphically

price = minimum ATC

allocative efficiency

producing at the amount most desired by society (allocating resources towards products society wants)

where is allocative efficiency graphically

price = marginal cost

when are perfectly competitive firms allocatively and productively efficient

in the long run

when are perfectly competitive firms only allocatively efficient and not productively efficient

in the short run

what is the MC curve above AVC

a short-run supply curve

what does per unit tax affect

variable costs (MC, AVC, and ATC)

does a per unit tax affect quantity produced

yes

lump sum tax/subsidy

only affects fixed costs (AFC, ATC); MC stays the same

do lump sum taxes affect the quantity produced

no

what does a change in fixed cost cause a shift in

ATC and AFC