AP Microeconomics Unit 3: Costs of Production and Perfect Competition
Terms in this set (...)
Law of Diminishing Marginal Returns
As variable resources are added to fixed resources, the additional output gradually decreases
resources that do NOT change with quantity produced
resources that DO change with the quantity produced
At lease 1 resource is fixed!
All resources are variable!
Total Fixed Costs
costs for fixed resources (do NOT change with the amount produced)
TFC / Q
costs for variable resources that DO change as more or less is produced
TVC / Q
sum of fixed AND variable costs
TC / Q
the additional cost of producing an ADDITIONAL unit of output
change in total costs / change in quantity (always 1)
What is unique about the MC line on a Cost Curve graph?
Marginal cost ALWAYS intersects the AVC and the ATC curves at their minimum point
What does the distance between ATC and AVC on a graph represent?
FC + VC = ?
If MP goes up, then MC goes ________.
MP peak could mean the MC ________.
If MP goes down, then MC goes _______.
Down; low; up
Shifts: What will be affected if fixed costs change?
TC, AFC, and ATC
Shifts: What will be affected if the variable costs change?
MC, AVC, ATC, and TC
What is the difference between total fixed cost and average fixed cost on a graph?
Total fixed cost is infinitely straight , AFC decreases with an increase in output
Economies of Scale
the downward part of the LRATC curve where long run average total cost falls as plant size rises
Constant Returns to Scale
the horizontal range of long-run average total cost where long run average total cost is constant over a variety of plant sizes
Diseconomies of Scale
the upward part of the LRATC curve where LRAC rises as plant size rises
Economies of Scale (inputs ? outputs)
Inputs less than (<) outputs
Constant Returns to Scale (inputs ? outputs)
Inputs equal to (=) outputs
Diseconomies of Scale (inputs ? outputs)
Inputs greater than (>) outputs
Profit Maximizing Output
where MR (marginal revenue) = (meets) MC (marginal cost)
***additional revenue of each unit = additional cost of each unit)
Marginal Revenue = Demand = Average Revenue (total per unit) = Price
How do you break even in perfect competition?
Profit = TR = TC or
Price = ATC
Price x Quantity
total revenue - total costs
If a firm is making profit in a perfectly competitive market, where is the ATC curve located?
Below MR (P>ATC)
If a firm is suffering loss in a perfectly competitive market, where is the ATC curve located?
Above MR (P<ATC)
If a firm is breaking even in a perfectly competitive market, where is the ATC curve located?
On MR (P=ATC)
Where is the supply curve for a perfect competitor?
Marginal cost curve above its AVC curve
What is the shut-down rule?
When a firm reaches P<AVC the firm should minimize losses by SHUTTING DOWN!
Per Unit / Excise tax (what does it shift? what does it cause quantity and profit to do?)
Shifts: AVC, ATC, MC
Causes quantity to: DECREASE
Causes profit to: DECREASE
Lump Sum tax (what does it shift? what does it cause quantity and profit to do?)
Shifts: AFC, ATC
Causes quantity to: DOES NOT CHANGE
Causes profit to: DECREASE
Constant Cost Industry
New firms entering the market DOES NOT increase the costs for the firms ALREADY in the market
***In the LR in a constant-cost industry, you will ALWAYS end up producing where ATC is at its minimum
Effects of entry of new firms in a perfectly competitive market (market supply/price/quantity, profit, firm output)
Market Supply: Increases
Market Price: Decreases
Profit: Falls to the breakeven point
Market Quantity: Increases
Firm Output: Falls
Effects of exit of existing firms in a perfectly competitive market (market supply/price/quantity, profit, firm output)
Market Supply: Decreases
Market Price: Increases
Profit: Increases to the breakeven point
Market Quantity: Decreases
Firm Output: Rises
where MC intersects ATC (ATC minimum)
Achieved in LR
P = MC
Achieved in SR and LR
What does it mean when a market in perfect competition has price = AVC?
Indifferent (stays open)
What are the three stages of returns on a graph? Why does the first stage occur?
Increasing MP (specialization), Decreasing MP, and Negative MP
Formula for Accounting Profit
difference between TR and total explicit costs
Formula for Economic Profit
difference between TR and total economic costs (implicit AND explicit)
What is normal profit?
"opportunity cost of the entrepreneur's talents" or
ZERO ECONOMIC PROFIT / BREAKING EVEN
List in order what happens in the long-run
1. Firms enter
2. Price goes down
3. All firms break even
True or False: Firms can enter and exit a perfectly competitive market in the short-run
FALSE!!! Firms can only enter and exit a perfectly competitive market in the LONG-RUN!!!
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