AP Micro - Section 10 Vocab - Behind The Supply Curve: Profit, Production, and Costs

Explicit Costs

Explicit Costs

out-of-pocket costs; payments made by firms for using resources (ex: rent, supplies..)

Implicit Costs

the opportunity costs that firms “pay” for using their own resources (ex: inheiritance…)

Accounting Profit

only looks at explicit costs (ACP = total revenue - explicit costs - depreciation)

Economic Profit

looks at both implicit and explicit costs (ECP = total revenue - economic costs (implicit+explict))

Positive Economic Profit

signals best use of resources

Negative Economic Profit

indicates better alternative use of resources

Normal Profit

breaking even (ACP = ECP)

Marginal Revenue

the additional revenue generated from selling one more unit of a good or service. (% change in TR / Q)

Optimal Output Rule

MR = MC

Marginal Cost Curve

The line that shows how the cost of producing one more unit depends on the quantity already produced.

Marginal Revenue Curve

MR = P (stays the same because we assume the market is constant)

Long Run

elastic (can expand/downsize); all costs are varied

Short Run

inelastic (can’t expand or downsize); at least one fixed cost

The Total Production Curve

Shows the relationship between the quantity of output produced and the quantity of the variable input used -all other inputs constant; three stages.

Marginal Product (of labor)

change in Q/change in labor

Diminishing Returns (to an input)

The Q of the variable input is increasing; fixed input stays the same

Fixed Cost

a cost that doesn’t change (ex: rent)

Fixed Input

Production factors that cannot be changed in the short run (ex: land)

Variable Input

Production factors that can be changed in the short run (ex: labor)

Total Cost Curve

Shows the total cost of producing different output levels in the short run.

Average Total Cost

Fixed cost per unit of output; the total fixed price / Q produced.

Spreading Out Effect

As the Q of output increases, fixed costs are spread out over a more significant number of units, leading to a decrease in AFC.

U-Shaped Average Total Cost Curve

Shows how the average total cost changes as the quantity of output produced varies

Average Fixed Costs

Average Variable Costs

Variable cost per unit of output; total variable cost / Q of output produced.

Minimum-Cost Output

The point where the ATC curve is at its lowest; the production level at which the firm produces most efficiently in terms of cost

Long-Run Average Total Cost Curve

Shows the lowest possible ATC of producing different output levels; The law of diminishing marginal returns doesn’t apply in the long run because there are no FIXED RESOURCES.

Increasing Returns (to scale)

When a firm increases its inputs; ATC decreases as the production scale expands. (bread more than doubles)

Economies of Scale

LRATC is falling as the firm expands.

Decreasing Returns (to scale)

When a firm increases its inputs; not benefiting from expansion (bread less than doubles)

Diseconomies (of scale)

LRATC is rising as the firm expands.

Constant Returns (to scale)

Firm increases its inputs by a particular proportion (bread doubles exactly)

Sunk Cost

Lost cost (losing a concert ticket)

Perfectly Competitive Market

Many small firms compete against each other

Perfectly Competitive Industry

Many small firms producing homogeneous or identical products

Market Share

Percentage of total sales in an industry that a company holds over a specific period.

Standardized Product

Uniform and consistent product; in perfect competition

Variable Cost

cost that rises/falls depending on how much is produced (ex: labor)

Total Cost

Fixed cost + Varible cost

Monopoly

One firm controls all (ex: water)

Barrier to Entry

How hard it is to enter a market. (ex: high start-up costs,

Natural Monopoly

Occurs when a single company can serve an entire market at a lower cost than two or more firms could (ex: water)

Patent

A legal protection the government grants an inventor the exclusive right to make, use, and sell an invention for ~20 years

Commodity

Basic good used in commerce that is interchangeable with other goods of the same type

Free Entry and Exit

Easy to enter and exit market (perf. Comp.)

Oligopoly

Afew firms dominate

Monopolistic Competition

Many firms offering similar but slightly differentiated products.