ap economics: module 53 terms

profit-maximizing quantity of output

quantity of output where total profit is the greatest; where the marginal cost and revenue curves intersect (MC = MR)

optimal output rule

profit is maximized by producing the quantity of output at which the MR of the last unit produced is equal to its MC

• increase production until marginal benefit equals marginal cost

• tells producers how much to produce

total revenue

market price * quantity of output

TR = PQ

profit

TR - TC

• total revenue - total cost

principle of marginal analysis

every activity should continue until MB = MC

marginal revenue

the change in TR generated by an additional unit of output

• MR = ΔTR/ΔQ

• same concept for MC

simplification for MC

it’s rising steadily

net gain of a unit of output

MR - MC

in perfectly competitive markets, marginal revenue = ____.

price

marginal cost curve

shows how the cost of producing one more unit depends on the quantity that has already been produced

• points plotted between units of quantity (midpoints)

marginal revenue curve

shows how marginal revenue varies as output varies

a firm’s decision to stay open or shut down in the LR should be dependent on what?

economic profit; as long as it is greater than or equal to zero, they should stay open—if it is less than zero → shut down

• accounting profit doesn’t consider implicit costs and o.c.