AP Microeconomics Unit 3 + 4

lillie if you're reading this stop ruining my fyp 💔🥀

Law of Diminishing Marginal Returns

As you add more units of input, the additional output from each input will eventually decrease

Stages of Production Function

Stage 1 - increasing marginal returns

Stage 2 - decreasing marginal returns

Stage 3 - negative marginal returns

Fixed costs

Costs that stay the same when quantity produced chances

Variable costs

Costs that change when quantity produced chances

Marginal cost

Additional cost from producing one more unit of ouput

How do you find total cost?

TFC + TVC

How do you find ATC?

AFC + AVC or TC/Q

How do you find AVC?

ATC - AFC or TVC/Q

How do you find AFC?

ATC - AVC or TFC/Q

Where does MC intersect ATC and AVC in perfect competition?

At their lowest points (minimum)

Economies of scale

Cost per unit decreases while output increases (more than doubles)

Constant returns to scale

Cost per unit stays the same while output increases (doubles)

Diseconomies of scale

Cost per unit increases while output increases (less than doubles)

Economies of scale observe a relationship between _________ and the __________

LR ATC, size of firm

Increasing returns to scale indicate a relationship between ________ and _________

inputs, outputs

Opportunity cost includes _________ costs

implicit

What is the profit-maximizing rule?

MR = MC

What is the shutdown point (and when should a firm exit the market)?

D = minimum AVC; leave market if D < minimum AVC

TR equation

P * Q

What is normal profit?

TR = TC → firm earns minimum amount necessary to continue operating (Econ profit = 0)

What will happen in the LR if a firm in a perfectly competitive market is making positive economic profit?

Firms will enter the market to capitalize off of the positive economic profit, bringing supply up and returning the market back to equilibrium

What will happen in the LR if a firm in a perfectly competitive market is making negative economic profit?

Firms will leave the market to minimize loss from negative economic profit, bringing supply down and returning the market back to equilibrium

What does it mean when firms are described as “price takers?”

Firms use the price set in the market → can’t set their own price

Characteristics of perfectly competitive markets

1. Large number of small firms

2. Each firm makes a standardized (identical) product

3. No barriers to entry

4. Firms don't have to advertise

5. Firms = price takers

If a firm’s price is above the ATC, that firm will be earning ___________ economic profits

positive

If a firm’s price is below the ATC, that firm will be earning ___________ economic profits

negative

If a firm’s price is below the ATC, that firm should stay in the market as long as the price is above the _________ curve

AVC

In a perfectly competitive market, a firm’s price is completely and always determined by the __________

market price

Regardless of where the price is for a firm, the firm should always produce where ______ and ______ intersect

MR, MC

Implicit costs

Opportunity cost of using a resource a firm already owns for which no direct payment is made

Explicit costs

Direct, out-of-pocket payment a business makes for resources in the production process (wages, rent, raw materials, etc)

When TP is at its maximum, MP = 

0

AFC is always ______

decreasing

Fixed costs are ________

constant

Implicit costs are ignored in ________ profit because they are part of the ____________

accounting, opportunity cost

A change in AVC results in a change in…

MC and ATC

A change in AFC results in a change in…

ATC

In perfect competition, the price always equals the _______ in the LR, but not necessarily in the SR

ATC

What are the 4 basic market structures in order from most competitive to least competitive?

Perfect competition, monopolistic competition, oligopoly, monopoly

Monopolies are price _______

makers

How many firms in a monopoly market?

1

There are _________ barriers to entry in a monopoly market

high

In the SR and LR, monopolies make __________ economic profits

positive

What is a natural monopoly?

A monopoly that produces the socially optimal quantity of a good at the lowest cost possible → one firm producing best option for society

What are some examples of a natural monopoly?

Utility/power lines, sewage system, etc

What is price discrimination?

When a different price is charged for each consumer

Why is price discrimination done?

To increase overall revenue and profits, maxing out PS and minimizing (or removing) CS

Why does D = MR in a price discrimination market?

Firms don’t need to adjust their prices to sell more products

Monopolistically competitive markets have a _________________ number of firms

relatively large

Monopolistically competitive firm produce _________________ products

differentiated

Monopolistically competitive firms must ______________ in order to get consumers to purchase their product

advertise

Monopolistic competition has ___________ barriers to entry

low

Monopolistically competitive firms are price ____________

makers

How does the monopolistically competitive graph differ from the monopoly graph?

D and MR are more elastic

What kind of profits do monopolistically competitive firms make in the long run (when producing at MR = MC) and why?

Zero, because other firms are easily able to enter/exit the market, impacting demand

How does the SR monopolistically competitive graph differ from the LR?

In the LR, ATC is tangent to demand at price, indicating zero economic profits

What is the allocatively efficient point on a graph?

D = MC

What is the productively efficient point on a graph?

Lowest point of ATC

Oligopoly markets have a _________ number of firms

small

Oligopolies are price ________

makers

Oligopolies have _________ barriers to entry

high

What is mutual interdependence?

When firms take the price decisions of their rivals into account, considering how their rivals will react before making a decision

What is game theory?

The study of how people/firms behave in strategic situations

What is a firm’s dominant strategy?

When a firm is better off no matter what their competitor does

What is the Nash Equilibrium?

Optimal outcome that will occur when two non-colluding firms make decisions using what they know about the other firm (both firms in the same matrix quadrant)

What is meant by saying that Oligopolies collude with one another?

When firms work together to fix prices at a high level to benefit each other, generating more profit

What is a cartel?

Groups of producers that collude, creating an agreement to fix prices at a high level to maximize profit for them all, producing an identical product

A colluding oligopoly’s graph looks like a ___________ because…

monopoly; the firms produce an identical product

What happens to price when the elasticity of the kinked demand curve changes on the graph of a non-colluding oligopoly?

Price = “sticky” → P and Q don’t change if MC moves up or down vertically

When MR goes negative, TR is _______

maximized

MC essentially = the __________ curve

supply

What is the break even point?

Price or Demand = ATC

Firms in monopolistic competition act ______________ in setting price and output while firms in oligopoly are ______________ in setting price and output

independent; interdependent

Firms in an imperfectly competitive market face a ____________-sloping demand curve. Therefore, to sell a larger quantity, firms must _________ their prices on all the units they sell

downward; reduce

The degree of elasticity depends on the number of _________ and the degree of product _____________

competitors; differentiation

When MR is positive, a positive change in P results in a __________ of TR, and a negative change in P results in a ________ of TR

increase; increase

When MR is negative, a positive change in P results in a ________ of TR, and a negative change in P results in a _______ of TR

increase; decrease

When MR is positive, the demand curve is ___________

relatively elastic

When MR is negative, the demand curve is ___________

relatively inelastic

Which line moves with demand (other than price)?

MR

Does Nick know what mutual independence is?

no lol