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

question
Profit
Total Revenue minus Total Cost
question
Explicit Cost
A cost that involves actually spending money. (p. 510)
question
Implicit Cost
A cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are foregone. (p. 510)
question
Accounting Profit
A business's total revenue minus the explicit cost and depreciation. (p. 511)
question
Depreciation
The reduction in value of capital over time.
question
Economic Profit
A business's total revenue minus the opportunity cost (including both implicit and explicit costs) of its resources; usually less than the accounting profit. (p. 511)
question
Implicit Cost of Capital
The opportunity cost o the capital used by a business - the income the owner could have realized from that capital if it had been used in its next best alternative way. (p. 512)
question
Normal Profit
An economic profit equal to zero; an economic profit just high enough to keep a firm engaged in its current activity. (p. 513)
question
Principle of Marginal Analysis
Says that every activity should continue until marginal benefit equals marginal cost. (p. 516)
question
Marginal Revenue
The change in total revenue generated by an additional unit of output. (p. 516)
question
Optimal Output Rule
Says that 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. (p. 516)
question
Production Function
The relationship between the quantity of inputs a firm uses and the quantity of output it produces. (p. 520)
question
Fixed Input
An input whose quantity is fixed for a period of time and cannot be varied (p. 520)
question
Variable Input
An input whose quantity the firm can vary at any time. (p. 520)
question
Long Run
The time period in which all inputs can be varied. (p. 520)
question
Short Run
The time period in which at least one input is fixed. (p. 520)
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. (p. 520)
question
Marginal Product
The additional quantity of output produced by using one more unit of an input. (p. 521)
question
Diminishing Returns to an Input
When an increase in the quantity of an input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input. (p. 522)
question
A cost that does not depend on the quantity of output produced; the cost of the fixed input. (p. 526)
question
Variable Cost
A cost that depends on the quantity of output produced; the cost of the variable input. (p. 526)
question
Total Cost Curve
Shows how total cost depends on the quantity of output; typically slopes upward at a decreasing rate, then at an increasing rate. (p. 526-527)
question
Marginal Cost
The change in total cost generated by producing one more unit of output.
question
Average Total Cost (ATC)/Average Cost
Total cost divided by quantity of output produced; also known as average cost. (p. 530)
question
Average Total Cost Curve
Shows how average total cost depends on output. (p. 530)
question
Averaged Fixed Cost (AFC)
The fixed cost per unit of output. (p. 530)
question
Average Variable Cost (AVC)
The variable cost per unit of output. (p. 530)
question
The larger the output, the greater the quantity of output over which the fixed cost is spread, leading to a lower average fixed cost.
question
The Diminishing Returns Effect
The larger the output, the greater the amount of the variable input required to produce additional units, leading to a higher average variable cost.
question
Average Variable Cost Curve
Shows how average variable cost depends on output; first slopes downward, then slopes upward as quantity increases. (p. 532)
question
Average Fixed Cost Curve
Shows how average fixed cost depends on output; slopes downward at an increasing rate (approaching a flat line at y=0) as output increases. (p. 532)
question
Marginal Cost Curve
Shows how marginal cost depends on quantity; first slopes downward due to specialization, then slopes upward due to diminishing returns.
question
Minimum-Cost Output
The quantity of output at which average total cost is lowest; corresponds to the bottom of the U-shaped average total cost curve. (p. 533)
question
U-shaped Average Total Cost Curve
Falls at low levels of output and then rises at higher levels of output. Believed by economists to be the norm for firms in many industries. (p. 530)
question
Average Product
The total product divided by the quantity of an input. (p. 535)
question
Average Product Curve
Shows the relationship between the average product and the quantity of an input.
question
Long-Run Average Total Cost Curve (LRATC)
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. (p. 539)
question
Economies of Scale
When long-run average total cost declines as output increases. (p. 541)
question
Increasing Returns to Scale
When output increases more than in proportion to an increase in all inputs; for example, doubling all inputs would cause output to more than double. (p. 541)
question
Minimum Efficient Scale
The smallest quantity at which a firm's long-run average total cost is minimized. (p. 541)
question
Diseconomies of Scale
When long-run average total cost increases as output increases. (p. 541)
question
Decreasing Returns to Scale
When output increases less than in proportion to an increase in all inputs. (p. 541)
question
Constant Returns to Scale
When output increases directly in proportion to an increase in all inputs. (p. 541)
question
Sunk Cost
A cost that has already been incurred and is nonrecoverable; should be ignored in a decision about future actions. (p. 542)
question
Differentiated Goods
Goods that are different but considered at least somewhat substitutable by consumers. (p. 544)
question
Price-Taking Firm
A firm whose actions have no effect on the market price of the good or service it sells. (p. 546)
question
Price-Taking Consumer
A consumer whose actions have no effect on the market price of the good or service they buy. (p. 546)
question
Perfectly Competitive Market
A market in which all market participants are price takers. (p. 546)
question
Perfectly Competitive Industry
An industry in which firms are price takers. (p. 546)
question
Market Share
The fraction of the total industry output accounted for by a given firm's output. (p. 546)
question
Standardized Product (aka Commodity)
Describes a good produced by different firms, but that consumers regard as the same good. (p. 547)
question
Entry
The arrival of new firms into an industry. (p. 547)
question
Exit
The departure of firms from an industry. (p. 547)
question
Free Entry and Exit
When new firms can easily enter into an industry and existing firms can easily leave that industry. (p. 547)
question
Monopolist
A firm that is the only producer of a good that has no close substitutes. (p. 548)
question
Monopoly
An industry controlled by a monopolist. (p. 548)
question
Barrier to Entry
Protects a monopolist (and allows it to persist and earn economic profits) by preventing other firms from entering the industry. (p. 548)
question
Natural Monopoly
A monopoly created when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output. (p. 548)
question
Network Externalities
A condition in some high-tech industries that arises when the value of a good to a consumer rises as the number of other people who also use the good rises; has the capability to offset technological superiority to allow a firm with inferior technology to become a monopolist. (p. 548)
question
Patent
Gives an inventor a temporary monopoly in the use or sale of an invention. (p. 549)
question
Gives the copyright holder for a literary or artistic work the sole right to profit from that work for a specified period of time. (p. 549)
question
Oligopoly
An industry with only a small number of firms. (p. 549)
question
Oligopolist
A producer in an oligopoly. (p. 549)
question
Imperfect Competition
Industry in which no one firm has a monopoly, but producers nonetheless realize that they can affect market prices. (p. 550)
question
Concentration Ratios
Measure of the percentage of the industry sales accounted for by the "X" largest firms; for example, the four-firm concentration ratio or the eight-firm concentration ratio. (p. 550)
question
Herfindahl-Hirschman Index (HHI)
The square of each firm's share of market sales summed over the industry; gives a picture of the industry market structure. (p. 550)
question
Monopolistic Competition
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. (p. 552)
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. (p. 567)
question
Break-Even Price
The market price at which a price-taking firm earns zero profit; the minimum average total cost of such a firm. (p. 573)
question
Shut-Down Price
The price at which a firm ceases production in the short run; equal to the minimum average variable cost. (p. 575)
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. (p. 576)
question
Industry/Market Supply Curve
Shows the relationship between the price of a good and the total output of the industry as a whole. (p. 580
question
Short-Run Industry Supply Curve
Shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms. (p. 580)
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. (p. 583)
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. (p. 584)
question
Constant-Cost Industry
An industry with a horizontal (perfectly elastic) long-run supply curve; the firms' cost curves are unaffected by changes in the size of the industry. (p. 584)
question
Increasing-Cost Industry
An industry with an upward-sloping long-run supply curve; the firms' production costs increase with the size of the industry. (p. 584)
question
Decreasing-Cost Industry
An industry with a downward-sloping long-run supply curve; the firms' production costs decrease as the industry grows. (p. 586)
1 of 78
question
Profit
Total Revenue minus Total Cost
question
Explicit Cost
A cost that involves actually spending money. (p. 510)
question
Implicit Cost
A cost that does not require an outlay of money; it is measured by the value, in dollar terms, of benefits that are foregone. (p. 510)
question
Accounting Profit
A business's total revenue minus the explicit cost and depreciation. (p. 511)
question
Depreciation
The reduction in value of capital over time.
question
Economic Profit
A business's total revenue minus the opportunity cost (including both implicit and explicit costs) of its resources; usually less than the accounting profit. (p. 511)
question
Implicit Cost of Capital
The opportunity cost o the capital used by a business - the income the owner could have realized from that capital if it had been used in its next best alternative way. (p. 512)
question
Normal Profit
An economic profit equal to zero; an economic profit just high enough to keep a firm engaged in its current activity. (p. 513)
question
Principle of Marginal Analysis
Says that every activity should continue until marginal benefit equals marginal cost. (p. 516)
question
Marginal Revenue
The change in total revenue generated by an additional unit of output. (p. 516)
question
Optimal Output Rule
Says that 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. (p. 516)
question
Production Function
The relationship between the quantity of inputs a firm uses and the quantity of output it produces. (p. 520)
question
Fixed Input
An input whose quantity is fixed for a period of time and cannot be varied (p. 520)
question
Variable Input
An input whose quantity the firm can vary at any time. (p. 520)
question
Long Run
The time period in which all inputs can be varied. (p. 520)
question
Short Run
The time period in which at least one input is fixed. (p. 520)
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. (p. 520)
question
Marginal Product
The additional quantity of output produced by using one more unit of an input. (p. 521)
question
Diminishing Returns to an Input
When an increase in the quantity of an input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input. (p. 522)
question
A cost that does not depend on the quantity of output produced; the cost of the fixed input. (p. 526)
question
Variable Cost
A cost that depends on the quantity of output produced; the cost of the variable input. (p. 526)
question
Total Cost Curve
Shows how total cost depends on the quantity of output; typically slopes upward at a decreasing rate, then at an increasing rate. (p. 526-527)
question
Marginal Cost
The change in total cost generated by producing one more unit of output.
question
Average Total Cost (ATC)/Average Cost
Total cost divided by quantity of output produced; also known as average cost. (p. 530)
question
Average Total Cost Curve
Shows how average total cost depends on output. (p. 530)
question
Averaged Fixed Cost (AFC)
The fixed cost per unit of output. (p. 530)
question
Average Variable Cost (AVC)
The variable cost per unit of output. (p. 530)
question
The larger the output, the greater the quantity of output over which the fixed cost is spread, leading to a lower average fixed cost.
question
The Diminishing Returns Effect
The larger the output, the greater the amount of the variable input required to produce additional units, leading to a higher average variable cost.
question
Average Variable Cost Curve
Shows how average variable cost depends on output; first slopes downward, then slopes upward as quantity increases. (p. 532)
question
Average Fixed Cost Curve
Shows how average fixed cost depends on output; slopes downward at an increasing rate (approaching a flat line at y=0) as output increases. (p. 532)
question
Marginal Cost Curve
Shows how marginal cost depends on quantity; first slopes downward due to specialization, then slopes upward due to diminishing returns.
question
Minimum-Cost Output
The quantity of output at which average total cost is lowest; corresponds to the bottom of the U-shaped average total cost curve. (p. 533)
question
U-shaped Average Total Cost Curve
Falls at low levels of output and then rises at higher levels of output. Believed by economists to be the norm for firms in many industries. (p. 530)
question
Average Product
The total product divided by the quantity of an input. (p. 535)
question
Average Product Curve
Shows the relationship between the average product and the quantity of an input.
question
Long-Run Average Total Cost Curve (LRATC)
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. (p. 539)
question
Economies of Scale
When long-run average total cost declines as output increases. (p. 541)
question
Increasing Returns to Scale
When output increases more than in proportion to an increase in all inputs; for example, doubling all inputs would cause output to more than double. (p. 541)
question
Minimum Efficient Scale
The smallest quantity at which a firm's long-run average total cost is minimized. (p. 541)
question
Diseconomies of Scale
When long-run average total cost increases as output increases. (p. 541)
question
Decreasing Returns to Scale
When output increases less than in proportion to an increase in all inputs. (p. 541)
question
Constant Returns to Scale
When output increases directly in proportion to an increase in all inputs. (p. 541)
question
Sunk Cost
A cost that has already been incurred and is nonrecoverable; should be ignored in a decision about future actions. (p. 542)
question
Differentiated Goods
Goods that are different but considered at least somewhat substitutable by consumers. (p. 544)
question
Price-Taking Firm
A firm whose actions have no effect on the market price of the good or service it sells. (p. 546)
question
Price-Taking Consumer
A consumer whose actions have no effect on the market price of the good or service they buy. (p. 546)
question
Perfectly Competitive Market
A market in which all market participants are price takers. (p. 546)
question
Perfectly Competitive Industry
An industry in which firms are price takers. (p. 546)
question
Market Share
The fraction of the total industry output accounted for by a given firm's output. (p. 546)
question
Standardized Product (aka Commodity)
Describes a good produced by different firms, but that consumers regard as the same good. (p. 547)
question
Entry
The arrival of new firms into an industry. (p. 547)
question
Exit
The departure of firms from an industry. (p. 547)
question
Free Entry and Exit
When new firms can easily enter into an industry and existing firms can easily leave that industry. (p. 547)
question
Monopolist
A firm that is the only producer of a good that has no close substitutes. (p. 548)
question
Monopoly
An industry controlled by a monopolist. (p. 548)
question
Barrier to Entry
Protects a monopolist (and allows it to persist and earn economic profits) by preventing other firms from entering the industry. (p. 548)
question
Natural Monopoly
A monopoly created when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output. (p. 548)
question
Network Externalities
A condition in some high-tech industries that arises when the value of a good to a consumer rises as the number of other people who also use the good rises; has the capability to offset technological superiority to allow a firm with inferior technology to become a monopolist. (p. 548)
question
Patent
Gives an inventor a temporary monopoly in the use or sale of an invention. (p. 549)
question
Gives the copyright holder for a literary or artistic work the sole right to profit from that work for a specified period of time. (p. 549)
question
Oligopoly
An industry with only a small number of firms. (p. 549)
question
Oligopolist
A producer in an oligopoly. (p. 549)
question
Imperfect Competition
Industry in which no one firm has a monopoly, but producers nonetheless realize that they can affect market prices. (p. 550)
question
Concentration Ratios
Measure of the percentage of the industry sales accounted for by the "X" largest firms; for example, the four-firm concentration ratio or the eight-firm concentration ratio. (p. 550)
question
Herfindahl-Hirschman Index (HHI)
The square of each firm's share of market sales summed over the industry; gives a picture of the industry market structure. (p. 550)
question
Monopolistic Competition
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. (p. 552)
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. (p. 567)
question
Break-Even Price
The market price at which a price-taking firm earns zero profit; the minimum average total cost of such a firm. (p. 573)
question
Shut-Down Price
The price at which a firm ceases production in the short run; equal to the minimum average variable cost. (p. 575)
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. (p. 576)
question
Industry/Market Supply Curve
Shows the relationship between the price of a good and the total output of the industry as a whole. (p. 580
question
Short-Run Industry Supply Curve
Shows how the quantity supplied by an industry depends on the market price, given a fixed number of firms. (p. 580)
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. (p. 583)
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. (p. 584)
question
Constant-Cost Industry
An industry with a horizontal (perfectly elastic) long-run supply curve; the firms' cost curves are unaffected by changes in the size of the industry. (p. 584)
question
Increasing-Cost Industry
An industry with an upward-sloping long-run supply curve; the firms' production costs increase with the size of the industry. (p. 584)
question
Decreasing-Cost Industry
An industry with a downward-sloping long-run supply curve; the firms' production costs decrease as the industry grows. (p. 586)

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