AP Microeconomics Unit 3

opportunity cost

the amount of other products that must be forgone or sacrificed to produce a unit of a product; aka economic cost

explicit cost

the monetary payment a firm must make to an outsider to obtain a resource

implicit cost

the monetary income a firm sacrifices when it use a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit

normal profit

the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm

economic profit

the total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called "pure profit" and "above-normal profit"

short run

a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable

long run

a period of time long enough to enable producers of a product to change the quantities of all the resources they employ; period in which all resources and costs are variable and no resources or costs are fixed

total profit

the total output of a particular good or service produced by a firm (or a group of firms or the entire economy)

marginal product

the additional output produced when one additional unit of a resource if employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed

average product

the total output produced per unit of a resource employed (total product divided by the quantity of that employed resource)

law of diminishing returns

the principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease

fixed cost

any cost that in total does not change when the firm changes its output; the cost of fixed resources

variable cost

a cost that in total increases when the firm increases its output and decreases when the firm reduces its output

total cost

the sum of fixed cost and variable cost

average fixed cost

a firm's total fixed cost divided by output (the quantity of product produced)

average variable cost

a firm's total variable cost divided by output (the quantity of product produced)

average total cost

a firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost

marginal cost

the extra (additional) cost of producing one more unit of output; equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output)

economies of scale

reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run the economies of mass production

diseconomies of scale

increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run

constant returns to scale

unchanging average total cost of producing a product as the firm expands the size of its plant (its output) in the long run

minimum efficient scale

the lowest level of output at which a firm can minimize long-run average total cost

natural monopoly

an industry in which economies of scale are so great that a single firm can produce the product at a lower average total cost that would be possible if more than one firm produced the product

law of diminishing marginal utility

the principle that as consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases

utility

the want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services)

total utility

the total amount of satisfaction derived from the consumption of a single product or a combination of products

marginal utility

the extra utility a consumer obtains from the consumption of one additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed

rational behavior

human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility

budget constraint

the limit that the size of a consumer's income (and the prices that must be paid for goods and services) imposes on the ability of that consumer to obtain goods and services

utility-maximizing rule

the principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility

income effect

a change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price

substitution effect

a change in the quantity demanded of a consumer good that results from a change in its relative expansiveness caused by a change in the product's price; the effect of a change in price of a resource on the quantity of the resource employed by a firm, assuming no change in its output

pure competition

a market structure in which a very large number of firms sells a standardized product, into which entry is very easy, in which the individual seller has no control over the product price, and in which there is no nonprice competition; a market characterized by a very large number of buyers and sellers

pure monopoly

a market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found

monopolistic competition

a market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price, and in which there is considerable nonprice competition

oligopoly

a market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition

imperfect competition

all market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly

price taker

a seller (or buyer) of a product or resource that is unable to affect the product or resource price by changing the amount it sells (or buys)

average revenue

total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price

total revenue

the total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold

marginal revenue

the change in total revenue that results from the sale of one additional unit of a firm's product; equal to the change in total revenue divided by the change in the quantity of the product sold

The additional income from selling one more unit of a good.

It is usually equal to price.

break-even point

an output at which a firm makes a normal profit (total revenue = total cost) but not an economic profit

MR = MC rule

the principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost

short-run supply curve

a supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firm's short-run marginal cost curve that lies above its average-variable-cost curve

long-run supply curve

a supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the long run

constant-cost industry

an industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs

increasing-cost industry

an industry in which expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs

decreasing-cost industry

an industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resource and therefore decreases their production costs

productive efficiency

the production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs

allocative efficiency

the apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price of marginal benefit are equal

consumer surplus

the difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price

producer surplus

the difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price

taker, world

What happens when the country Isoland begins to trade, and the World Price for Steel is more expensive?

--Isoland's Steel Industry is a price _______

They will sell the steel at the _______ market price.

decreases, increases, increases

Isoland Exports:

CS ____________

PS____________

TS_____________

exporter, better, raises, exceed

When Domestic prices are Higher Lower than World Prices: Arguments For Free trade:

-Nation becomes an __________

-Domestic producers and workers are ________ off

-Trade __________ the economic well-being of the nation - gains of the winners __________ the losses of the losers

worse, consumers

When Domestic prices are Higher Lower than World Prices:

Arguments Against Free Trade:

-Domestic consumers are _________ off

-Positive economic impacts may or may not reach all _____________

Q X AFC

TFC =

Q X AVC

TVC =

TFC + TVC

Q X ATC

TC =

TFC/Q

AFC =

TVC/Q

AVC =

TC/Q

AFC + AVC

ATC =

change in TC/change in Q

change in TVC/change in Q

MC =

lower

If Isoland becomes an Importer, what does that say about the World Price of Steel compared to that of Isoland?

It is ________ than domestic equilibrium

increases, decreases, increases

Isoland Imports:

CS ____________

PS____________

TS_____________

better, exceed

When Domestic Prices are higher than world prices:

Arguments for Free Trade:

Domestic consumers are ___________ off

Trade raises the economic well-being of the nation - gains of the winners ___________losses of the losers

worse, increase

When Domestic Prices are higher than world prices:

Arguments Against Free Trade:

Domestic producers and workers are __________off

The ____________ in economic well being of the country does not necessarily help the producers and workers of the particular industry.

tariff

What can Isoland do to help its Steel producers when the world market price is lower than domestic equilibrium?

Pass a _______ on imported steel

decreases, increases, increases, decreases

Isoland places a tariff on steel:

CS ____________

PS____________

Gov Revenue _____________

TS_____________

increase, domestic, reduces

Should a country invoke a tariff on a particular industry?

Arguments for a Tariff:

Domestic producers ___________ production

Helps ___________producers and workers

___________ the amount of imports

reduction, deadweight loss

Should a country invoke a tariff on a particular industry?

Arguments Against a Tariff:

___________ of consumption, consumers lose surplus and pay a higher price

Creates ___________ ________

decreases, increases, none, decreases

Isoland creates a quota:

CS ______________

PS_______________

Gov Revenue____________

TS_______________

explicit

Accountants look at the ____________ costs

fixed, capacity, output, labor, materials, rate, time

Short Run:

-___________ Plant Capacity

-Too short a time to alter plant ___________, but long enough to vary its ___________by applying different amounts of _________ or __________.

-_______ Decision

-No set ______ period

variable, resources, capacity, enter and exit, supply

Long Run:

___________ Plant Capacity

Long enough to adjust the amount of all ___________, including plant ___________

Other firms will ___________ industry.

Can shift __________ curve.

total product

total quantity X output of a particular good or service

increasing, diminishing, negative

___________ marginal returns occur when marginal production levels increase with new investment.

___________ marginal returns occur when marginal production levels decrease with new investment.

___________ marginal returns occur when the marginal product of labor becomes negative.

fixed costs

Costs that don't vary with changes in output.

The same whether output is zero or infinity.

Rent, interest on debts, insurance, depreciation of assets, etc.

variable costs

Costs that change with level of output.

Cost per unit of output.

Materials, ingredients, fuel, power, transportation, labor, etc.

sunk costs

Costs that are incurred

There is nothing you can do about them.

They are irrelevant to your current

decision-making process.

fixed

All sunk costs are _________ costs

rate

Short Run--there is at least one fixed cost and at least one variable cost

_________ decision

capacity

Long Run--All costs are variable costs

_________ decision

accounting, economic

_______________ profits - only calculated by TR minus explicit costs

________________profit - calculated by TR minus Explicit and Implicit Costs

Total revenue, total cost, marginal revenue-marginal cost

Two Ways to Determine that Q will Profit Maximize:

___________ and ____________curves. TR > TC

When total revenue exceeds total cost by the largest amount.

(2) ______________-______________Approach MR = MC Rule

lowest, MC

Diminishing marginal returns sets in at the ________ point of the ____ curve

many, sellers, substitutes, entry, exit, existing, takers

Perfect Competition: ______Buyers (Thousands, Tens of Thousands, Millions)

Buyer can tell seller to get lost

2. ______Sellers (Dozens, Hundreds, Even Thousands)

Seller can tell a buyer to go to Hell!

Michigan that is ;)

3. Tons of _________ (Identical Products)

In the Long Run - easy ______/easy ______ for the supplier.

No advantage for _________ firms.

4. Buyers and sellers are price __________

profit, losses

In the Long Run:

Two forces are at work in a market undergoing technological change.

1. Firms that adopt the new technology make an economic _________

So new-technology firms have an incentive to enter.

2. Firms that stick with the old technology incur economic ________

They either exit the market or switch to the new technology.

long, fixed

Law of diminishing returns does NOT apply in the ______ run (because no_______ costs)

unit, specialization, efficient, Declining

Economies of Scale:

Cheaper per ______at Mass Production

Reasons:

Labor/ Manager _____________

________ Capital/ Machinery

Product Development, Advertising cheaper per extra unit

____________ ATC at this portion of the curve.

large, levels, increasing

Diseconomies of Scale:

Difficulty of efficiently controlling a firms operations when it becomes a ______ scale producer.

Reasons:

Many ________ between executives and production- communication/ cooperation issues.

____________ ATC at this portion of the curve.

many, differentiated, narrow, easy, advertising, brand, trademarks

Monopolistic Competition:

1. _______ firms

2. _____________ product

3. Some, but rather ________ limits on controlling price

4. Relatively _______ to enter

5. Considerable emphasis on ___________, ______ names, and ____________

few, standardized, differentiated, mutual interdependence, obstacles, differentiation

Oligopoly:

1. _______ firms

2. _____________ or ________________ product

3. Controlling price limited by _______ ____________; considerable with collusion

4. Significant ___________ to entry

5. Typically a great deal of nonprice competition, particularly with product ______________

One, unique, substitutes, considerable, blocked, relations

Pure Monopoly:

1. _______ firm

2. __________ product; no _____________

3. ____________ control over price

4. ____________ entry

5. Mostly public ___________ advertising