AP Microeconomics – Unit 3: Production, Cost, and the Perfect Competition Model

question

Profit

answer

Total Revenue minus Total Cost

question

Explicit Cost

answer

A cost that involves actually spending money. (p. 510)

question

Implicit Cost

answer

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

answer

A business's total revenue minus the explicit cost and depreciation. (p. 511)

question

Depreciation

answer

The reduction in value of capital over time.

question

Economic Profit

answer

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

answer

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

answer

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

answer

Says that every activity should continue until marginal benefit equals marginal cost. (p. 516)

question

Marginal Revenue

answer

The change in total revenue generated by an additional unit of output. (p. 516)

question

Optimal Output Rule

answer

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

answer

The relationship between the quantity of inputs a firm uses and the quantity of output it produces. (p. 520)

question

Fixed Input

answer

An input whose quantity is fixed for a period of time and cannot be varied (p. 520)

question

Variable Input

answer

An input whose quantity the firm can vary at any time. (p. 520)

question

Long Run

answer

The time period in which all inputs can be varied. (p. 520)

question

Short Run

answer

The time period in which at least one input is fixed. (p. 520)

question

Total Product Curve

answer

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

answer

The additional quantity of output produced by using one more unit of an input. (p. 521)

question

Diminishing Returns to an Input

answer

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

Fixed Cost (FC)/Overhead Cost

answer

A cost that does not depend on the quantity of output produced; the cost of the fixed input. (p. 526)

question

Variable Cost

answer

A cost that depends on the quantity of output produced; the cost of the variable input. (p. 526)

question

Total Cost Curve

answer

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

answer

The change in total cost generated by producing one more unit of output.

question

Average Total Cost (ATC)/Average Cost

answer

Total cost divided by quantity of output produced; also known as average cost. (p. 530)

question

Average Total Cost Curve

answer

Shows how average total cost depends on output. (p. 530)

question

Averaged Fixed Cost (AFC)

answer

The fixed cost per unit of output. (p. 530)

question

Average Variable Cost (AVC)

answer

The variable cost per unit of output. (p. 530)

question

The Spreading Effect

answer

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

answer

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

answer

Shows how average variable cost depends on output; first slopes downward, then slopes upward as quantity increases. (p. 532)

question

Average Fixed Cost Curve

answer

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

answer

Shows how marginal cost depends on quantity; first slopes downward due to specialization, then slopes upward due to diminishing returns.

question

Minimum-Cost Output

answer

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

answer

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

answer

The total product divided by the quantity of an input. (p. 535)

question

Average Product Curve

answer

Shows the relationship between the average product and the quantity of an input.

question

Long-Run Average Total Cost Curve (LRATC)

answer

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

answer

When long-run average total cost declines as output increases. (p. 541)

question

Increasing Returns to Scale

answer

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

answer

The smallest quantity at which a firm's long-run average total cost is minimized. (p. 541)

question

Diseconomies of Scale

answer

When long-run average total cost increases as output increases. (p. 541)

question

Decreasing Returns to Scale

answer

When output increases less than in proportion to an increase in all inputs. (p. 541)

question

Constant Returns to Scale

answer

When output increases directly in proportion to an increase in all inputs. (p. 541)

question

Sunk Cost

answer

A cost that has already been incurred and is nonrecoverable; should be ignored in a decision about future actions. (p. 542)

question

Differentiated Goods

answer

Goods that are different but considered at least somewhat substitutable by consumers. (p. 544)

question

Price-Taking Firm

answer

A firm whose actions have no effect on the market price of the good or service it sells. (p. 546)

question

Price-Taking Consumer

answer

A consumer whose actions have no effect on the market price of the good or service they buy. (p. 546)

question

Perfectly Competitive Market

answer

A market in which all market participants are price takers. (p. 546)

question

Perfectly Competitive Industry

answer

An industry in which firms are price takers. (p. 546)

question

Market Share

answer

The fraction of the total industry output accounted for by a given firm's output. (p. 546)

question

Standardized Product (aka Commodity)

answer

Describes a good produced by different firms, but that consumers regard as the same good. (p. 547)

question

Entry

answer

The arrival of new firms into an industry. (p. 547)

question

Exit

answer

The departure of firms from an industry. (p. 547)

question

Free Entry and Exit

answer

When new firms can easily enter into an industry and existing firms can easily leave that industry. (p. 547)

question

Monopolist

answer

A firm that is the only producer of a good that has no close substitutes. (p. 548)

question

Monopoly

answer

An industry controlled by a monopolist. (p. 548)

question

Barrier to Entry

answer

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

answer

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

answer

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

answer

Gives an inventor a temporary monopoly in the use or sale of an invention. (p. 549)

question

answer

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

answer

An industry with only a small number of firms. (p. 549)

question

Oligopolist

answer

A producer in an oligopoly. (p. 549)

question

Imperfect Competition

answer

Industry in which no one firm has a monopoly, but producers nonetheless realize that they can affect market prices. (p. 550)

question

Concentration Ratios

answer

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)

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

Total Revenue minus Total Cost

question

Explicit Cost

answer

A cost that involves actually spending money. (p. 510)

question

Implicit Cost

answer

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

answer

A business's total revenue minus the explicit cost and depreciation. (p. 511)

question

Depreciation

answer

The reduction in value of capital over time.

question

Economic Profit

answer

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

answer

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

answer

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

answer

Says that every activity should continue until marginal benefit equals marginal cost. (p. 516)

question

Marginal Revenue

answer

The change in total revenue generated by an additional unit of output. (p. 516)

question

Optimal Output Rule

answer

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

answer

The relationship between the quantity of inputs a firm uses and the quantity of output it produces. (p. 520)

question

Fixed Input

answer

An input whose quantity is fixed for a period of time and cannot be varied (p. 520)

question

Variable Input

answer

An input whose quantity the firm can vary at any time. (p. 520)

question

Long Run

answer

The time period in which all inputs can be varied. (p. 520)

question

Short Run

answer

The time period in which at least one input is fixed. (p. 520)

question

Total Product Curve

answer

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

answer

The additional quantity of output produced by using one more unit of an input. (p. 521)

question

Diminishing Returns to an Input

answer

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

Fixed Cost (FC)/Overhead Cost

answer

A cost that does not depend on the quantity of output produced; the cost of the fixed input. (p. 526)

question

Variable Cost

answer

A cost that depends on the quantity of output produced; the cost of the variable input. (p. 526)

question

Total Cost Curve

answer

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

answer

The change in total cost generated by producing one more unit of output.

question

Average Total Cost (ATC)/Average Cost

answer

Total cost divided by quantity of output produced; also known as average cost. (p. 530)

question

Average Total Cost Curve

answer

Shows how average total cost depends on output. (p. 530)

question

Averaged Fixed Cost (AFC)

answer

The fixed cost per unit of output. (p. 530)

question

Average Variable Cost (AVC)

answer

The variable cost per unit of output. (p. 530)

question

The Spreading Effect

answer

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

answer

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

answer

Shows how average variable cost depends on output; first slopes downward, then slopes upward as quantity increases. (p. 532)

question

Average Fixed Cost Curve

answer

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

answer

Shows how marginal cost depends on quantity; first slopes downward due to specialization, then slopes upward due to diminishing returns.

question

Minimum-Cost Output

answer

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

answer

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

answer

The total product divided by the quantity of an input. (p. 535)

question

Average Product Curve

answer

Shows the relationship between the average product and the quantity of an input.

question

Long-Run Average Total Cost Curve (LRATC)

answer

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

answer

When long-run average total cost declines as output increases. (p. 541)

question

Increasing Returns to Scale

answer

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

answer

The smallest quantity at which a firm's long-run average total cost is minimized. (p. 541)

question

Diseconomies of Scale

answer

When long-run average total cost increases as output increases. (p. 541)

question

Decreasing Returns to Scale

answer

When output increases less than in proportion to an increase in all inputs. (p. 541)

question

Constant Returns to Scale

answer

When output increases directly in proportion to an increase in all inputs. (p. 541)

question

Sunk Cost

answer

A cost that has already been incurred and is nonrecoverable; should be ignored in a decision about future actions. (p. 542)

question

Differentiated Goods

answer

Goods that are different but considered at least somewhat substitutable by consumers. (p. 544)

question

Price-Taking Firm

answer

A firm whose actions have no effect on the market price of the good or service it sells. (p. 546)

question

Price-Taking Consumer

answer

A consumer whose actions have no effect on the market price of the good or service they buy. (p. 546)

question

Perfectly Competitive Market

answer

A market in which all market participants are price takers. (p. 546)

question

Perfectly Competitive Industry

answer

An industry in which firms are price takers. (p. 546)

question

Market Share

answer

The fraction of the total industry output accounted for by a given firm's output. (p. 546)

question

Standardized Product (aka Commodity)

answer

Describes a good produced by different firms, but that consumers regard as the same good. (p. 547)

question

Entry

answer

The arrival of new firms into an industry. (p. 547)

question

Exit

answer

The departure of firms from an industry. (p. 547)

question

Free Entry and Exit

answer

When new firms can easily enter into an industry and existing firms can easily leave that industry. (p. 547)

question

Monopolist

answer

A firm that is the only producer of a good that has no close substitutes. (p. 548)

question

Monopoly

answer

An industry controlled by a monopolist. (p. 548)

question

Barrier to Entry

answer

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

answer

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

answer

question

Patent

answer

Gives an inventor a temporary monopoly in the use or sale of an invention. (p. 549)

question

answer

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

answer

An industry with only a small number of firms. (p. 549)

question

Oligopolist

answer

A producer in an oligopoly. (p. 549)

question

Imperfect Competition

answer

Industry in which no one firm has a monopoly, but producers nonetheless realize that they can affect market prices. (p. 550)

question

Concentration Ratios

answer

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)

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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

answer

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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AP Microeconomics – Unit 3: Production, Cost, and the Perfect Competition Model

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