AP Micro CRAM

shutdown rule

shutdown when P < AVC

—> firms should shut down when TR is insufficient to cover VC. If they continue to produce, they will end up with more losses than if they decide to shut down and just incur FC.

Short run production costs

AFC: decreasing into asymptote

AVC: above AFC, below ATC, cuts MC at min

ATC: above AVC, cuts MC at min

economies of scale

the cost advantages a firm gains by increasing its production output (lower per-unit costs)

—> ATC decreases as output increases

—> long run production cost

diseconomies of scale

the cost disadvantages a firm faces when increasing production (higher per-unit costs)

—> ATC increases as output increases

—> long run production cost

constant returns to scale

proportional increase in all inputs leads to a proportional increase in output

economic profit

revenue - explicit cost - implicit cost

accounting profit - implicit cost

accounting profit

revenue - explicit cost

implicit costs

opportunity costs

explicit costs

costs that involve spending money

perfect competition

• many competitors

• identical products

• no barriers to entry

• no price control (price takers)

monopoly

• 1 firm

• unique products

• high barriers to entry

• 100% price control (price makers)

monopolistic competition

• many firms

• differentiated products

• no barriers to entry

• limited price control

oligopoly

• few firms

• identical or differentiated goods

• has barriers to entry

• significant price control

oligopoly cartels

group of firms that cooperate to set prices or production levels to maximize collective profits

oligopoly collusion

act of firms cooperating to set prices or output levels, acting collectively to increase profits

antitrust policy

government regulations aimed at promoting competition to prevent monopolies

monopsony

a market with 1 buyer

producer/consumer surplus on competitions

maximizing revenue

MR = 0

determinants of DL (factor market)

• Productivity of workers

• Produce price

• Product demand

determinants of SL

anything impacting number of workers: age, population, availability…

marginal revenue product (MRP)

MR x P

marginal resource cost (MRC)

change in TRC (total resource cost)

total resource cost (TRC)

wage x QL

marginal product (MP)

change in total output/change in input

—> change in Q / change in # of workers

least cost rule

marginal product per $: MP / P

choose input with higher marginal product per $

factor market profit maximization

MRP = MRC

allocative efficiency

MB = MC

D = MC

productive efficiency

ATC = MC

lorenz curve

measures the distribution of income equality

(want to be as close to the perfect equality line)

gini coefficient

A/(A+B)

• Closer to 0, more equality (smaller A area)

• Closer to 1, more inequality (bigger A area)

elasticity calculation

(% change in Qd) / (% change in P)

marginal revenue (MR)

change in the TR/change in Q

Marginal cost (MC)

change in TC / change in Q