ap microeconomics unit 3

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what is production?

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1

what is production?

converting input into output

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2

what are fixed resources?

resources that don’t change with the quantity produced

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3

what are variable resources?

resources that do change with the quantity produced

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4

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

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5

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

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6

input for short run

fixed input

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7

input for long run

enough time to change input

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8

what does a firm need to do to earn profit?

make products (output)

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9

what are inputs

the resources used to make output

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10

what are input resources also called

factors

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11

what is total physical product (TP)

total output or quantity produced

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12

what is marginal product

additional output generated by additional inputs (workers)

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13

what is average product

output per unit of input

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14

what is the formula for marginal product

change in total product / change in inputs

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15

what is the formula for average product

total product / units of labor (# workers)

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16

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

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17

what is stage one in graphing production

increasing marginal returns

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18

what happens during the increasing marginal returns phase of a graph

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

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19

what is stage two in graphing production

decreasing marginal returns

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20

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

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21

what is stage three in graphing production

negative marginal returns

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22

what happens during the negative marginal returns phase of a graph

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

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23

what are the all of the economic total costs?

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

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24

what are all of the economic per unit costs?

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

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25

fixed costs

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

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26

what are some examples of fixed costs

rent, insurance, manager salaries

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27

formula for average fixed costs

fixed cost / quantity

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28

variable costs

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

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29

what are some examples of variable costs

raw materials, labor, electricity

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30

what is the formula for average variable costs

variable costs / quantity

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31

total cost

fixed cost + variable cost

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32

average total cost

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

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33

marginal cost

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34

what are some examples of marginal costs

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

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35

what is the formula for marginal cost

change in cost / change in quantity

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36

why is the MC curve U - shaped

because of diminishing marginal returns

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37

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

increasing marginal returns

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38

what happens to the marginal cost as production increases?

it increases because each worker adds less and less

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39

when does the MC curve intersect the ATC curve

at the ATC’s lowest point

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40

what happens when the marginal cost is below average

pulls average down

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41

what happens when marginal cost is above average

pulls average up

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42

what is the long run used for

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

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43

economies of scale

as production increases, long-run average total cost decreases

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44

why do economies of scale occur?

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

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45

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

mass production techniques are used

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46

constant returns to scale

long run average cost is as low as it can get

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47

diseconomies of scale

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

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48

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

there are no fixed resources

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49

what is the profit formula

total revenue - total cost

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50

what is the total revenue formula

price output x quantity sold

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51

total cost

cost of all inputs used

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52

implicit cost

a cost that is measured in the cost of forgone opportunities

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53

explicit costs

a cost that requires paying out money

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54

how are implicit costs related to opportunity costs

what is forgone when you choose one thing over another

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55

opportunity cost

explicit cost + implicit cost

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56

what is the accounting profit formula

business’s total revenue - explicit costs and depreciation

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57

what is the economic profit formula

business’s total revenue - opportunity cost of its resources

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58

why do businesses face implicit costs

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

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59

what does a positive economic profit indicate?

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

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60

what does a negative economic profit indicate

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

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61

normal profit

economic profit of zero

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62

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

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63

what will rational firms use to ensure profit marginalization?

marginal analysis

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64

what is the goal of every business?

to maximize profit

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65

what must a firm do in order to maximize profit

make the right output

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66

when should firms continue to produce until

marginal revenue equals the marginal cost

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67

how do firms maximize profit

setting quantity where marginal revenue equals marginal cost

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68

marginal revenue

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

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69

formula for marginal revenue

change in total revenue / change in quantity of output

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70

what is the shut down rule

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

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71

under what circumstances will firms still operate in the short run

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

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72

when should a firm shut down

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

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73

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

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

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74

sunk cost

a cost that has already been incurred and cannot be recouped

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75

what is important to remember about sunk costs?

ignore them and move forward

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76

why do firms enter a market in the long run

if there are profit making opportunities

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77

when will a firm exit a market

if they anticipate economic losses

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78

barriers to entry

factors that prevent new firms from entering a given market

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79

what does having low barriers generally entail for markets

more competition (many firms) individual firms make less profit

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80

what does having high barriers generally entail for markets

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

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81

example of firm with low barriers to entry

coffee shops

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82

example of firm with high barriers to entry

car manufacturers

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83

normal profit

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

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84

what will firms do in the long run

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

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85

constant cost industry

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

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86

increasing cost industry

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

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87

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

horizontal

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88

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

upward sloping because the ATC increases

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89

productive efficiency

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

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90

where is productive efficiency graphically

price = minimum ATC

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91

allocative efficiency

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

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92

where is allocative efficiency graphically

price = marginal cost

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93

when are perfectly competitive firms allocatively and productively efficient

in the long run

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94

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

in the short run

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95

what is the MC curve above AVC

a short-run supply curve

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96

what does per unit tax affect

variable costs (MC, AVC, and ATC)

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97

does a per unit tax affect quantity produced

yes

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98

lump sum tax/subsidy

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

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99

do lump sum taxes affect the quantity produced

no

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100

what does a change in fixed cost cause a shift in

ATC and AFC

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