AP Microeconomics: Perfect Competition and Costs of Production

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output it produces

question

fixed input

answer

an input whose quantity is fixed for a period of time and cannot be varied; constant and cannot change

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variable input

answer

an input whose quantity the firm can vary at any time

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long run

answer

all inputs are variable

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short run

answer

at least one input is fixed

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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

question

marginal product

answer

the additional quantity of output produced by using one more unit of that input

question

marginal product of labor equation

answer

change in quantity of output/change in quantity of labor

question

marginal product equation

answer

change in total product / change in inputs

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diminishing returns to an input

answer

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

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fixed cost

answer

a cost that does not change, no matter how much of a good is produced

question

variable cost

answer

a cost that rises or falls depending on how much is produced

question

total cost

answer

fixed costs plus variable costs

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marginal cost

answer

the cost of producing one more additional unit of a good

question

marginal cost equation

answer

change in total cost / change in quantity

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average cost

answer

total cost / quantity of output produced

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u-shaped average total cost curve

answer

falls at low levels of output, then rises at higher levels

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average variable cost

answer

variable cost / quantity of output

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average fixed cost

answer

fixed cost / quantity of output

question

spreading effect

answer

the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost

question

diminishing returns effect

answer

the larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost

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minimum cost output

answer

the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.

question

MCO comparisons

answer

- at MCO, average total cost = marginal cost
- when output < MCO, marginal cost < average total cost (ATC is falling)
- when output > MCO, marginal cost > average total cost (ATC is rising)

question

production

answer

taking inputs and making them into outputs
- to earn profit, firms must make products

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total physical product

answer

total output or quantity produced

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fixed resources

answer

resources that don't change with quantity produced

question

variable resources

answer

resources that do change with quantity produced

question

law of diminishing marginal returns

answer

As variable resources (workers) are added to fixed resources (machinery, tool, etc.), the additional output produced from each new worker will eventually fall

question

per unit costs

answer

AFC, AVC, ATC, MC

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examples of fixed costs

answer

rent, taxes, insurance

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examples of variable costs

answer

direct materials and direct labor

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per unit costs graph

answer

- ATC and AVC get close but never touch
- AFC never hits 0

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marginal cost and marginal product graph

answer

MP and MC are mirrors of each other

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marginal cost relative to the average

answer

- when marginal cost is below the average, it pulls the average down
- when marginal cost is above the average, it pulls the average up
- marginal cost intersects average total cost at ATC's lowest point

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increasing returns to scale

answer

when output more than doubles after doubling input

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constant returns to scale

answer

when output doubles after doubling input

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decreasing returns to scale

answer

when output less than doubles after doubling input

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economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises; long-run average cost falls

question

why do economies of scale occur

answer

they occur because firms that produce more and have more money can better use mass production techniques and specialization

question

what happens when mass production is used

answer

total cost overall is higher, but average cost is significantly lower

question

diseconomies of scale

answer

long-run average costs increase as the firm gets too big and difficult to manage

question

long run average cost curve

answer

a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed; short run average over time

question

economies of scale

answer

a cost that has already been paid and cannot be recovered; should not be factored in to making future decisions

question

sunk cost

answer

price x quantity

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total revenue

answer

total revenue - total cost

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profit

answer

total revenue - explicit costs

question

accounting profit

answer

total revenue - explicit costs - implicit costs

question

economic profit

answer

The actual payments a firm makes to its factors of production and other suppliers
ex: rent, materials

question

explicit costs

answer

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
ex: forgone rent, forgone wage, time

question

implicit costs

answer

no economic profit

question

normal profit

answer

setting prices so that total revenue is as large as possible relative to total costs

question

profit maximization

answer

marginal cost = marginal revenue

question

when is profit maximized

answer

every activity should continue until marginal benefit equals marginal cost

question

principal of marginal analysis

answer

change in total revenue / change in quantity

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marginal revenue equation

answer

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

optimal output rule

answer

- a few large producers
- identical or differentiated products
- high barriers to entry
- control over price
- mutual interdependence - firms must worry about the decisions of their competition

question

Oligopoly

answer

- relatively large number of sellers
- differentiated products
- some control over price but lots of advertising competition
- low barriers

question

monoploistic competition

answer

- one large firm
- unique product
- high barriers
- price maker

question

monopoly

answer

- many small firms
- identical products
- low barriers
- no need to advertise
- firms are price takers (no control over price)

question

perfect competition

answer

perfectly elastic

question

perfect competition demand curve

answer

- firms will enter if there is profit and leave if there is loss
- in the long run, all firms break even and make normal profit (no economic profit)
- price = mc = minimum atc
- price will always push to where mc = minimum atc

question

MR = D = AR = P

answer

long run supply is horizontal and only quantity changes

question

perfect competition in the short run

answer

Entry of new firms shifts the cost curves for all firms upward

question

perfect competition in the long run

answer

a situation in which a good or service is produced at the lowest possible cost

question

constant cost industry

answer

a situation in which the quanitites of goods and services produced are those that people value most highly, when price = MC

question

increasing cost industry

answer

productive and allocatively

question

productive efficiency

answer

only allocatively

question

allocative efficency

answer

undefined

question

in the long run, firms are efficient...

answer

undefined

question

in the short run, firms are efficient...

answer

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1 of 70

question

production function

answer

the relationship between quantity of inputs used to make a good and the quantity of output it produces

question

fixed input

answer

an input whose quantity is fixed for a period of time and cannot be varied; constant and cannot change

question

variable input

answer

an input whose quantity the firm can vary at any time

question

long run

answer

all inputs are variable

question

short run

answer

at least one input is fixed

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

question

marginal product

answer

the additional quantity of output produced by using one more unit of that input

question

marginal product of labor equation

answer

change in quantity of output/change in quantity of labor

question

marginal product equation

answer

change in total product / change in inputs

question

diminishing returns to an input

answer

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

fixed cost

answer

a cost that does not change, no matter how much of a good is produced

question

variable cost

answer

a cost that rises or falls depending on how much is produced

question

total cost

answer

fixed costs plus variable costs

question

marginal cost

answer

the cost of producing one more additional unit of a good

question

marginal cost equation

answer

change in total cost / change in quantity

question

average cost

answer

total cost / quantity of output produced

question

u-shaped average total cost curve

answer

falls at low levels of output, then rises at higher levels

question

average variable cost

answer

variable cost / quantity of output

question

average fixed cost

answer

fixed cost / quantity of output

question

spreading effect

answer

the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost

question

diminishing returns effect

answer

the larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost

question

minimum cost output

answer

the quantity of output at which the average total cost is lowest—the bottom of the U-shaped average total cost curve.

question

MCO comparisons

answer

- at MCO, average total cost = marginal cost
- when output < MCO, marginal cost < average total cost (ATC is falling)
- when output > MCO, marginal cost > average total cost (ATC is rising)

question

production

answer

taking inputs and making them into outputs
- to earn profit, firms must make products

question

total physical product

answer

total output or quantity produced

question

fixed resources

answer

resources that don't change with quantity produced

question

variable resources

answer

resources that do change with quantity produced

question

law of diminishing marginal returns

answer

As variable resources (workers) are added to fixed resources (machinery, tool, etc.), the additional output produced from each new worker will eventually fall

question

per unit costs

answer

AFC, AVC, ATC, MC

question

examples of fixed costs

answer

rent, taxes, insurance

question

examples of variable costs

answer

direct materials and direct labor

question

per unit costs graph

answer

- ATC and AVC get close but never touch
- AFC never hits 0

question

marginal cost and marginal product graph

answer

MP and MC are mirrors of each other

question

marginal cost relative to the average

answer

question

increasing returns to scale

answer

when output more than doubles after doubling input

question

constant returns to scale

answer

when output doubles after doubling input

question

decreasing returns to scale

answer

when output less than doubles after doubling input

question

economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises; long-run average cost falls

question

why do economies of scale occur

answer

they occur because firms that produce more and have more money can better use mass production techniques and specialization

question

what happens when mass production is used

answer

total cost overall is higher, but average cost is significantly lower

question

diseconomies of scale

answer

long-run average costs increase as the firm gets too big and difficult to manage

question

long run average cost curve

answer

a curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed; short run average over time

question

economies of scale

answer

a cost that has already been paid and cannot be recovered; should not be factored in to making future decisions

question

sunk cost

answer

price x quantity

question

total revenue

answer

total revenue - total cost

question

profit

answer

total revenue - explicit costs

question

accounting profit

answer

total revenue - explicit costs - implicit costs

question

economic profit

answer

The actual payments a firm makes to its factors of production and other suppliers
ex: rent, materials

question

explicit costs

answer

Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
ex: forgone rent, forgone wage, time

question

implicit costs

answer

no economic profit

question

normal profit

answer

setting prices so that total revenue is as large as possible relative to total costs

question

profit maximization

answer

marginal cost = marginal revenue

question

when is profit maximized

answer

every activity should continue until marginal benefit equals marginal cost

question

principal of marginal analysis

answer

change in total revenue / change in quantity

question

marginal revenue equation

answer

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

optimal output rule

answer

- a few large producers
- identical or differentiated products
- high barriers to entry
- control over price
- mutual interdependence - firms must worry about the decisions of their competition

question

Oligopoly

answer

- relatively large number of sellers
- differentiated products
- some control over price but lots of advertising competition
- low barriers

question

monoploistic competition

answer

- one large firm
- unique product
- high barriers
- price maker

question

monopoly

answer

- many small firms
- identical products
- low barriers
- no need to advertise
- firms are price takers (no control over price)

question

perfect competition

answer

perfectly elastic

question

perfect competition demand curve

answer

question

MR = D = AR = P

answer

long run supply is horizontal and only quantity changes

question

perfect competition in the short run

answer

Entry of new firms shifts the cost curves for all firms upward

question

perfect competition in the long run

answer

a situation in which a good or service is produced at the lowest possible cost

question

constant cost industry

answer

a situation in which the quanitites of goods and services produced are those that people value most highly, when price = MC

question

increasing cost industry

answer

productive and allocatively

question

productive efficiency

answer

only allocatively

question

allocative efficency

answer

undefined

question

in the long run, firms are efficient...

answer

undefined

question

in the short run, firms are efficient...

answer

undefined

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