AP Micro Unit 3: Production, Cost and the Perfect Competition Model - Custom Scholars
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# AP Micro Unit 3: Production, Cost and the Perfect Competition Model

question
Profit
total revenue minus total cost
question
total revenue
Price x Quantity
question
explicit costs
costs that require an outlay of money
question
implicit costs
does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone, opportunity costs
question
accounting profit
the business's total revenue minus the explicit cost and depreciation
question
economic profit
total revenue minus total cost, including both explicit and implicit costs
question
implicit cost of capital
the opportunity cost of the use of one's own capital - the income earned if the capital had been employed in its next best alternative use
question
normal profit
an economic profit equal to zero; an economic profit just high enough to keep a firm engaged in its current activity
question
optimal output rule
profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost
question
principle of marginal analysis
every activity should continue until marginal benefit equals marginal cost
question
marginal revenue
The change in total revenue generated by an additional unit of output.
question
optimal output rule
profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost
question
marginal cost curve
shows how the cost of producing one more unit depends on the quantity that has already been produced
question
Marginal revenue curve
shows how marginal revenue varies as output varies
question
production function
the relationship between the quantity of inputs a firm uses and the quantity of output it produces
question
fixed input
an input whose quantity is fixed for a period of time and cannot be varied
question
variable input
An input whose quantity the firm can vary at any time.
question
Fixed Cost (FC)
a cost that does not depend on the quantity of output produced. It's the cost of the fixed inputs.
question
Variable Costs (VC)
Costs that depends on the quantity of output produced. It's the cost of the variable inputs.
question
Total Cost (TC)
total fixed costs plus total variable costs
question
long run
the time period in which all inputs can be varied
question
short run
the period of time during which at least one of a firm's inputs is fixed
question
total product curve
shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input
question
marginal product
the increase in output that arises from an additional unit of input
question
diminishing returns to an input
when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input
question
total cost curve
shows how total cost depends on the quantity of output
question
Average Total Cost (ATC)
total costs divided by quantity of output
question
U-shaped average total cost curve
falls at low levels of output, then rises at higher levels
question
Average Fixed Cost (AFC)
total fixed costs divided by quantity of output
question
Average Variable Cost (AVC)
variable cost divided by the quantity of output
question
minimum-cost output
the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.
question
average product
Total product divided by the quantity of the input.
question
Average product curve
shows the relationship between the average product and the quantity of the input
question
long-run average total cost curve
shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output
question
economies of scale
when long-run average total cost declines as output increases
question
increasing returns to scale
when output increases more than in proportion to an increase in all inputs
question
minimum efficient scale
Smallest quantity at which a firm's long-run average total cost is minimized.
question
diseconomies of scale
when long-run average total cost increases as output increases
question
Decreasing returns to scale
when output increases less than in proportion to an increase in all inputs
question
constant returns to scale
when output increases directly in proportion to an increase in all inputs
question
sunk cost
a cost that has already been paid and cannot be recovered
question
price-taking firm
a firm whose actions have no effect on the market price of the good or service it sells
question
price-taking consumer
a consumer whose actions have no effect on the market price of the good or service he or she buys
question
perfectly competitive market
a market in which all market participants are price-takers
question
perfectly competitive industry
an industry in which firms are price-takers
question
market share
the fraction of the total industry output accounted for by a given producer's output
question
standardized product (commodity)
when consumers regard the products of different firms as the same good
question
free entry and exit
when new firms can easily enter into the industry and existing firms can easily leave the industry
question
Monopolist
the only producer of a good that has no close substitutes
question
Monopoly
an industry controlled by a monopolist
question
barriers to entry
Something that prevents other firms from entering the industry.
question
Natural monoploly
When economies do scale provide a large cost advantage to a single firm that produces all of an industry's output.
question
patent
gives an inventor a temporary monopoly in the use or sale of an invention
question
gives the creator of a literary or artistic work sole rights to profit from that work for a specified period of time
question
Oligopoly
an industry with only a small number of producers
question
Oligopolist
a producer in an oligopoly
question
imperfect competition
when no one firm has a monopoly, but producers nonetheless realize that they can affect market prices
question
concentration ratios
measures the percentage of industry sales accounted for by the "X" largest firms
question
Herfindahl-Hirschman Index
The square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure.
question
monopolistic competition
a market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run
question
price-taking firm's optimal output rule
says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced
question
break-even point
Of a price-taking firm is in the market price at which it earns zero profit.
question
shut-down price
when a firm ceases production in the short run if the market price falls below this price; equal to minimum average variable cost
question
Short-Run Firm Supply Curve
Shows how an individual firm's profit-maximizing level of output depends on the market price, taking the fixed cost as given.
question
industry supply curve or market supply curve
Shows the relationship between the price of a good and the total output of the industry as a whole
question
short-run industry supply curve
shows how the quantity supplied by an industry depends on the market price given a fixed number of producers
question
long-run market equilibrium
when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur
question
long-run industry supply curve
shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry
question
constant cost industry
Firms' cost curves are unaffected by changes in the size of the industry and the long-run industry supply curve is horizontal (perfectly elastic)
question
increasing cost industry
Firms' production costs increase with the size of the industry and the long-run industry supply curve is upward-sloping.
question
decreasing cost industry
Firms' production costs decrease as the industry grows and the long-run supply curve is downward sloping.
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question
Profit
total revenue minus total cost
question
total revenue
Price x Quantity
question
explicit costs
costs that require an outlay of money
question
implicit costs
does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are forgone, opportunity costs
question
accounting profit
the business's total revenue minus the explicit cost and depreciation
question
economic profit
total revenue minus total cost, including both explicit and implicit costs
question
implicit cost of capital
the opportunity cost of the use of one's own capital - the income earned if the capital had been employed in its next best alternative use
question
normal profit
an economic profit equal to zero; an economic profit just high enough to keep a firm engaged in its current activity
question
optimal output rule
profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost
question
principle of marginal analysis
every activity should continue until marginal benefit equals marginal cost
question
marginal revenue
The change in total revenue generated by an additional unit of output.
question
optimal output rule
profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost
question
marginal cost curve
shows how the cost of producing one more unit depends on the quantity that has already been produced
question
Marginal revenue curve
shows how marginal revenue varies as output varies
question
production function
the relationship between the quantity of inputs a firm uses and the quantity of output it produces
question
fixed input
an input whose quantity is fixed for a period of time and cannot be varied
question
variable input
An input whose quantity the firm can vary at any time.
question
Fixed Cost (FC)
a cost that does not depend on the quantity of output produced. It's the cost of the fixed inputs.
question
Variable Costs (VC)
Costs that depends on the quantity of output produced. It's the cost of the variable inputs.
question
Total Cost (TC)
total fixed costs plus total variable costs
question
long run
the time period in which all inputs can be varied
question
short run
the period of time during which at least one of a firm's inputs is fixed
question
total product curve
shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input
question
marginal product
the increase in output that arises from an additional unit of input
question
diminishing returns to an input
when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input
question
total cost curve
shows how total cost depends on the quantity of output
question
Average Total Cost (ATC)
total costs divided by quantity of output
question
U-shaped average total cost curve
falls at low levels of output, then rises at higher levels
question
Average Fixed Cost (AFC)
total fixed costs divided by quantity of output
question
Average Variable Cost (AVC)
variable cost divided by the quantity of output
question
minimum-cost output
the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.
question
average product
Total product divided by the quantity of the input.
question
Average product curve
shows the relationship between the average product and the quantity of the input
question
long-run average total cost curve
shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output
question
economies of scale
when long-run average total cost declines as output increases
question
increasing returns to scale
when output increases more than in proportion to an increase in all inputs
question
minimum efficient scale
Smallest quantity at which a firm's long-run average total cost is minimized.
question
diseconomies of scale
when long-run average total cost increases as output increases
question
Decreasing returns to scale
when output increases less than in proportion to an increase in all inputs
question
constant returns to scale
when output increases directly in proportion to an increase in all inputs
question
sunk cost
a cost that has already been paid and cannot be recovered
question
price-taking firm
a firm whose actions have no effect on the market price of the good or service it sells
question
price-taking consumer
a consumer whose actions have no effect on the market price of the good or service he or she buys
question
perfectly competitive market
a market in which all market participants are price-takers
question
perfectly competitive industry
an industry in which firms are price-takers
question
market share
the fraction of the total industry output accounted for by a given producer's output
question
standardized product (commodity)
when consumers regard the products of different firms as the same good
question
free entry and exit
when new firms can easily enter into the industry and existing firms can easily leave the industry
question
Monopolist
the only producer of a good that has no close substitutes
question
Monopoly
an industry controlled by a monopolist
question
barriers to entry
Something that prevents other firms from entering the industry.
question
Natural monoploly
When economies do scale provide a large cost advantage to a single firm that produces all of an industry's output.
question
patent
gives an inventor a temporary monopoly in the use or sale of an invention
question
gives the creator of a literary or artistic work sole rights to profit from that work for a specified period of time
question
Oligopoly
an industry with only a small number of producers
question
Oligopolist
a producer in an oligopoly
question
imperfect competition
when no one firm has a monopoly, but producers nonetheless realize that they can affect market prices
question
concentration ratios
measures the percentage of industry sales accounted for by the "X" largest firms
question
Herfindahl-Hirschman Index
The square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure.
question
monopolistic competition
a market structure in which there are many competing firms in an industry, each firm sells a differentiated product, and there is free entry into and exit from the industry in the long run
question
price-taking firm's optimal output rule
says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced
question
break-even point
Of a price-taking firm is in the market price at which it earns zero profit.
question
shut-down price
when a firm ceases production in the short run if the market price falls below this price; equal to minimum average variable cost
question
Short-Run Firm Supply Curve
Shows how an individual firm's profit-maximizing level of output depends on the market price, taking the fixed cost as given.
question
industry supply curve or market supply curve
Shows the relationship between the price of a good and the total output of the industry as a whole
question
short-run industry supply curve
shows how the quantity supplied by an industry depends on the market price given a fixed number of producers
question
long-run market equilibrium
when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur
question
long-run industry supply curve
shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry
question
constant cost industry
Firms' cost curves are unaffected by changes in the size of the industry and the long-run industry supply curve is horizontal (perfectly elastic)
question
increasing cost industry
Firms' production costs increase with the size of the industry and the long-run industry supply curve is upward-sloping.
question
decreasing cost industry
Firms' production costs decrease as the industry grows and the long-run supply curve is downward sloping.

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