AP Microeconomics Units 3 & 4

3.1 The Production Function

The Law of Diminishing Returns: As variable resources are added to fixed resources the additional output produced from each additional unit of the variable resource will eventually decrease.

3.2 Short-Run Production Costs

  1. Fixed Costs (FC)- Cost for fixed resources that DON’T change with the amount produced

  2. Variable Costs (VC)- Cost for variable resources that DO change as less or more is added

  3. Total Cost (TC)- Sum of fixed variable costs

  4. Marginal Costs (MC)- Additional costs of an additional output

3.3 Long-Run Production Costs

Economies of Scale- Long-run AC falls beccause mass production techniques are used

When do economies of scale? Firms that produce more can better use mass production techniques and specialization

3.4 Types of Profit

Accounting Profit- Accountants only look at explicit costs; payments paid by firms for using the resources of others

Economic Profit- Both explicit and implicit costs; opportunity costs that firms “pay” for for using their own resources

3.5 Profit Maximization

The goal of businesses is to maximize profit

To maximize profit frims must make the right output

Firms should continue to produce unti the additonal revenue from each new output equals the additional cost

MR=MC

3.7 Perfect Competiton

Characteristics:

  1. Many firms

  2. Identical products

  3. No ads

  4. Price Takers

  5. Low barries to join

Allocative Efficiency- Markets use scarce resources to make products and provide the services that society demands

Productive Efficiency- A situation where firms or economies are producing goods and servicees at the lowest possible costs

Unit 4 Imperfect Competiton

Monolistic competition characteristics

  1. Many firms

  2. Differntiated products

  3. Ads

  4. Low barries

  5. Price makers

Oligopolies

  1. Few firms

  2. Similar products

  3. Ads

  4. High barriers

  5. Price makers

Monopolies

  1. One firm dominates

  2. Unique products

  3. Price makers

  4. Some ads

  5. Price Makers

Why are monopolies inefficient?

  1. Charge higher prices

  2. Not allocative efficient

  3. Not productively efficient