AP Microeconomics Vocabulary & AP Microeconomics Graphs

The value to a firm of hiring one more unit of a factor of production, which equals the price of a unit of output multiplied b y the marginal product of the factor of production.

A real wage rate that is set above the full employment equilibrium wage rate to induce greater work effort.

A cost or a benefit that arises from production and that falls on someone other than the producer; or a cost or benefit that arises from consumption and that falls on someone other than the consumer.

An action taken by an informed person or firm to send a message to less informed people.

The division of the burden of a tax between the buyer and the seller.

The proposition that if property rights exist, only a small number of oartuies are involved, and transaction costs are low, then private transactions are efficient and the outcome is not affected by who is assigned the property right.

A good, service, or resource is excludable if its possible to prevent someone from enjoying its benefits.

A curve that graphs the cumulative percentage of income or wealth against the cumulative percentage of households.

A good or service that can be consumed by only one person at a time and only by the person who has bought it or owns it.

A good or service that can be consumed simultaneously by everyone and from which no one can be excluded.

A resource that can be used only once, but no one can be prevented from using what is available.

A person who enjoys the benefits of a good or service without paying for it.

The absence of incentives to prevent the overuse and depletion of a commonly owned resource.

A tax whose average rate is constant at all income levels.

A tax whose average rate isnvreases as income increases.

A tax whose average rate decreases as income increases.

The change in total revenue that results from a one unit increase in the quantity sold.

A previously incurred and irreversible cost,

A market in which one firm sells a good or service that has no close substitutes and a barrier blocks the entry of new firms.

A monopoly that arises because one firm can meet the entire market demand at a lower average total cost than two or more firms could.

The decrease in total surplus that results from an inefficient underproduction or overproduction.

A market in which a small number of independent firms compete.

A market in which a large number of firms compete by making similar but slightly different products.

The tool that economists use to analyze strategic behavior--behavior that recognizes mutual interdependence and takes account of the expected behavior of adukts .

A group of firms acting together to limit output, raise price, and increase economic profit.

An equilibrium in which each player takes the best possible action given the action of the other player.

A game between two prisoners that shows why it is hard to cooperate, even when it would be beneficial to both players to do so.

Income earned by an entrepreneur for running a business.

A firm's total revenue minus total cost.

A cost paid in money.

An opportunity cost incurred by a firm when it uses a factor of a production for which it does not make a direct money payment.

The change in total product that results from a one unit increase in the quantity of labor employed.

The quantity at which average total cost is a minimum.

A condition in which, when a firm increases its plant size and labor employment by the same percentage, its output increases by a larger percentage and its average total cost decreases.

A condition in which, when a firm increases its plant size and labor employed by the same percentage, its output increases by a smaller percentage and its average total cost increases.

A condition in which, when a firm increases its plant size and labor employed by the same percentage, its output increases by that same percentage and its average total cost remains constant.

Any arrangement that brings buyers and sellers together and enables the to get information and do business with each other.

Other things remaining the same, if the price of a good rises, the quantity demanded of the good decreases; and if the price of a good falls, the quantity demanded of that good increases.

A list of the quantities demanded at each different price when all the other influences on buying plans remain the same.

A graph of the relationship between the quantity demanded of a good and its price when all the other influences on buying plans remain the same

A good for which demand increases when income increases and demand decreases when income decreases.

A good for which demand decreases when income increases and demand increases when income decreases.

A good that can be consumed in place of another good.

A good that is consumed with another good.

Other things remaining the same , if the price of a good rises, the quantity supplied of that good increases; and if the price of a good falls, the quantity supplied of that good decreases.

A list of the quantities supplied at each different price when all the other influences on selling plans remain the same.

A graph of the relationship between the quantity supplied of a good and its price when all the other influences on selling plans remain the same.

A situation in which the quantity supplied exceeds the quantity demanded.

A situation in which the quantity demanded exceeds the quantity supplied.

The amount spent on a good and received by the seller and equals the price of the good multiplied by the quantity of the good sol.

A measure of the responsiveness of the quantity of supplied of a good to a charge in its price when all other influences on the sellers' plans remain the same.

A government regulation that places an upper limit on the price at which a particular good, service, or factor of production may be traded.

A government regulation that places a lower limit on the price at which a particular good, service, or factor of production many be traded.

The marginal benefit from a good or service minus the price paid for it, summed over the quantity consumed.

The price of a good minus the marginal cost of producing it, summed over the quantity produced.

The social science that studies the choices that individuals, businesses, government, and entire societies make as they cope with scarcity, the incentives, the influence those choices, and the arrangements that coordinate them.

The opportunity cost of something is the best thing you must give up to get it.

The productive resources that are used to produce goods and services--land, labor, capital, entrepreneurship

An exchange --giving up on one thing to get something else

A system that allocates resources by the order of someone in authority

The boundaries between the combination of goods and services that can be produced and the combinations that can't be produced, given the available factors of production and the state of the technology.

The study of of the choices that individuals and businesses make and the way these choices interact and are influenced by governments.

The study of aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make.

When one person is more productive than another person in several or even all activities.

The ability of a person to perform an activity or produce a good at a lower opportunity cost than anyone else

What to produce?
How to produce?
For Whom to Produce?
How much to produce?

a single-number measure of income inequality; ranges from 0 to 1, with higher numbers meaning greater inequality

To find the amount of resources (i.e. labor)

to find the right amount of quantity of products to make; profit maximization point

Optimal Level of Activity;
condition of allocative efficiency

P=MC&D

P=ATC&D

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it; derived whenever the price a consumer actually pays is less than they are prepared to pay.

A legal minimum price that a product cannot be sold below-- creates surplus.
- The more elastic d and s are, greater the surplus= greater gov't spending= greater taxes
Price may also be set above the natural market price. A price floor, which is also referred to as a minimum price, sets the lowest level possible for a price.

A PPF shows all the possible combinations of two goods, or two options available at one point in time.
Opportunity cost can be illustrated by using production possibility frontiers (PPFs) which provide a simple, yet powerful tool to illustrate the effects of making an economic choice. Describes the maximum amount of one good that can be produced for every possible level of production of the other good

Economic growth has two meanings:

Firstly, and most commonly, growth is defined as an increase in the output that an economy produces over a period of time, the minimum being two consecutive quarters.

The second meaning of economic growth is an increase in what an economy can produce if it is using all its scarce resources. An increase in an economy's productive potential can be shown by an outward shift in the economy's production possibility frontier (PPF).

In a free market economy, resources are allocated through the interaction of free and self-directed market forces. This means that what to produce is determined consumers, how to produce is determined by producers, and who gets the products depends upon the purchasing power of consumers.

Is the allocation of scarce resources by government, or an agency appointed by the government. This method is referred to as central planning, and economies that exclusively use central planning are called command economies. In other words governments direct or command resources to be used in particular ways.

Demand curves generally have a negative slope. There are at least three accepted explanations of why demand curves slope downwards:

The law of diminishing marginal utility

The income effect

The substitution effect

All societies face the economic problem, which is the problem of how to make the best use of limited, or scarce, resources. The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited.

NIFTS

PPTTEN

Equilibrium price is also called market clearing price because at this price the exact quantity that producers take to market will be bought by consumers, and there will be nothing 'left over'. This is efficient because there is neither an excess of supply and wasted output, nor a shortage - the market clears efficiently. This is a central feature of the price mechanism, and one of its significant benefits.

An increase in demand shifts the demand curve to the right, and raises price and increase the quantity supply.

A decrease in demand shifts the demand curve to the left and reduces price and decreases the quantity supplied.

An increase in supply shifts the supply curve to the right, which reduces price and increases the quantity demanded.

A decrease in supply shifts the supply curve to the left, which raises price but reduces the quantity demand.

Producer surplus is the additional private benefit to producers, in terms of profit, gained when the price they receive in the market is more than the minimum they would be prepared to supply for. In other words they received a reward that more than covers their costs of production.

Economic welfare is the total benefit available to society from an economic transaction or situation.
Economic welfare is also called community surplus. Welfare is represented by the area ABE in the diagram below, which is made up of the area for consumer surplus, ABP plus the area for producer surplus, PBE.

A Lorenz curve shows the % of income earned by a given % of the population. A 'perfect' income distribution would be one where each % received the same % of income. The further the Lorenz curve is from the 45 degree line, the less equal is the distribution of income.

A subsidy of B - C (U - S) would provide the necessary incentives for universities to supply Q1 places, and for students to take-up this number. If funded in this way, students would contribute part of the real cost of their education by paying C, which is equivalent to the private benefit they expect to derive, and 'society', would contribute a further part of the cost of education (B - C) equivalent to the external benefit which is derived by society. This subsidy would be funded through taxation.

A price ceiling may be set to prevent price from rising beyond a predetermined level. A price ceiling will only have an effect on the market if it is set below the prevailing market clearing price. A price ceiling is also called a maximum price.
A legal maximum price that a product cannot be sold above-- creates shortage.
- The more elastic d and s are, greater the shortage
- Can create black market

Benefits someone receives when not involved in the activity
- Means there is an underallocation for those resources in the market
- Solution is a subsidy for producer
- Supply curve will hopefully shift to Dprivate at Qsocial
a benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring farmer plants clover. An external benefit or a spillover benefit.

Negative affects someone when not involved in production of activity
- Means there is an overallocation for those resources in the market
- Solution is a tax on the one who produces the negative costs
a cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: a manufacturer dumps toxic chemicals into a river, killing the fish sought by sports fishers; an external cost or a spillover cost

A market in which a single firm is the only buyer
- Wage (labor supply) curve is upward sloping
- Marginal factor cost now greater than wage

equilibrium where MC=MR
break even where MC=MR=ATC
shutdown where P<AVC
P=MC=MR

profit maximization where MC=MR
Profit where MC=MR lines up with the demand (P-ATC)*Q
P>MR=MC

short-run = has positive economic profit
long-run= break even
Profit= where ATC lines up with demand where MR=MC
barriers to entry are low and many firms compete by selling similar, but not identical, products.

A market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors. A market structure in which a few large firms dominate a market.

Responsiveness of quantity to price

Changes in quantity are relatively large when price is changed. Often occurs for luxury goods or goods that can be purchased easily elsewhere.
Ex: iPods or Sprite

Changes in quantity are relatively small when price is changed. Often occurs for necessities that people are willing to pay for even at a high price.
Ex: Vaccines
abs value of Ed is less than 1
Describes demand that is not very sensitive to price changes

Changes in quantity respond perfectly to price (I.e. The percentage change in quantity will equal the percentage change in price)

Straight horizontal line. Quantity responds enormously to changes in price.
price elasticity of demand is infinite, small change in price brings a huge change in quantity demanded

∆%Quantity/ ∆%Price

∆%Qd/ ∆%P
Measures normal (Lux/nec.) vs. inferior

∆%Qd/ ∆%Income
Measures normal (Lux/nec.) vs. inferior based on consumer income

∆%QdX/ ∆%PY
Measures comp vs. sub

QDemanded is less than QSupplied.
Price will fall.
(Will always return to equilibrium in the long run)

QDemanded exceeds QSupplied.
Price will rise.
(Will always return to equilibrium in the long run)

When d=MC

- Increases as quantity moves further from equilibrium

INDIRECT relationship between price and quantity demanded.

DIRECT relationship between price and quantity supplied.

The change in quantity demanded resulting from a change in the consumer's purchasing power (or real income).

The more one consumes of a good, the less additional utility that last unit consumed provides, therefore consumers are only willing to buy additional units of a good if the price decreases.

The extra revenue produced by one more unit of labor. MRP = change in total revenue/ change in labor

- Works opposite way of a tax

1) Tastes of consumers
2) Income of consumers
3) Number of consumers
4) Expectations of consumers
5) Related goods' prices (Subs/Comps)
6) Special Circumstances (Nature)

1) Subsidies (Out) and Taxes (In)
2) Technology
3) Other manufactured goods' prices
4) Resource costs
5) Expectations of future prices
6) Number of suppliers

Happiness gained from consumption of a certain amount of a good

Additional utility received or lost by consumption of the next good
∆TotalU/ ∆Q
- Constantly diminishing

MUa/Pa = MUb/Pb = MUc/Pc...

Additional income of selling one more good
- In PC, MR=P=AR=D

opportunity cost of producing one more unit of a good
∆TVC/∆Q
- Initially falls due to specialization
- MC= ATC or MC= AVC at respective minimums (MC is least when costs are least)
- Forms "checkmark"

- Shut down when TVC exceeds revenue to minimize loss (loss will only be TFC)
Short run: MC above SDP is the supply curve for each PC firm
Long run: Firms see profit and will continue to enter market, shifting S right until MC=MR=P=ATC= No profit!

TC/Q
- Form "U-Shape" with ATC being x=AFC higher than AVC

TVC/Q
- Form "U-Shape"
TVC/Q
- Form "U-Shape"

Costs that do not vary with changes in short-run output, paid even when output is 0

Costs that change with variations in output. If output is 0, TVC= 0.

All that is given up in choosing to produce one good over another (next-best option); best alternative sacrificed for chosen alternative

Buildings, machines, technology, and tools needed to produce goods and services.

Products and services that satisfy human wants directly

Subjective statements
Ex: There should be less unemployment.

Objective statements
Ex: Unemployment is at 4.5% this year.

1) Capital
2) Land
3) Labor
4) Entrepreneurship

1) Substitutes
- Necessity/ luxury often refers to relative supply (or lack of) substitutes
2) Income
3) Time

Only TIME.
Inelastic in short run (changes harder to make in order to supply more)
Elastic in long run (more changes made over longer period of time)

Total revenue minus total explicit costs (purchased)

Marginal decrease of cost, advantages of larger firms (Falling LRAC); Factors that cause a producer's average cost per unit to fall as output rises
- Specialization and efficiency

Can occur when Long-Run AC is constant over a variety of plant sizes (Nearly flat LRAC)

Can occur if a firm becomes too large (rising LRAC)
- Less efficient due to poor management, communication, etc

Market Shares of top 4 firms added
- Higher is closer to monopoly
- Lower approaches perfect competition
- Max is 100%

Sum of the squares of the top 50 firms' market shares
- Higher is closer to monopoly
- Max is 10 000

Goods for which demand increases as consumer income increases (AKA Superior Goods)

Goods for which demand decreases as consumer income increases (Includes fast food, cheap clothes, etc.)

Firms can expand or reduce plant capacity, therefore supply is highly price elastic.
- Economic profit will= 0 (break even)

Indirect opportunity costs

Direct, purchased, objective costs

The ability to produce more of a given product using a given amount of resources

The ability to produce a good at a lower
than another producer

Production of maximum output for a given level of technology and resources

Occurs when an economy's PPC increases due to one or more of the following:
1) Increase in quantity of resources
2) Increase in quality of current resources
3) Advancements in technology

1) Private property
2) Freedom to produce, purchase, and sell resources
3) Competition
4) Self-interest
5) Prices

Sum of consumer and producer surpluses-- free market equilibrium provides maximum combined gain to society

A per-unit tax levied on a particular good or service - federal excise tax on gasoline.
1) Increase government revenue
2) Decrease consumption of harmful good
Tax * New Quantity
- Creates loss of efficiency (MB>MC),

As successive units of a variable resource are added to a fixed resource, beyond some point the marginal product falls.

1) Many small independent producers and consumers
2) Produce a standardized product
3) No barriers to entry or exit
4) Firms are "price takers"
Example: Agriculture
- d=p=MR=AR

- Firm will have perfectly elastic (horizontal) demand curve-- changing price will infinitely affect its demand
- Market will not necessarily have perfectly elastic demand curve but changes in firm will not affect market

- Cannot change price, only output
- TC and TR will continually increase
- Choose level where MC=MR
Tπ= Equ. Quantity * (P-ATC)
TR= Equ. Quantity * Equ. Price
TC= Equ. Quantity * (TR-Tπ)

- Never leave Qe! OR DIE.
- When P=ATC, π=0
- At Qe...
- If MC<ATC, loss (ATC will not hit d curve)
- If MC>ATC, profit

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

Entry of new firms shifts the cost curves for all firms downward
- Takes longer for profit to be eliminated
- Lower LR price than constant

1) Single producer
2) No close substitutes
3) Barriers to Entry
4) Market Power-- "Price Maker"

1) Legal barriers (Ex. patents)
2) Economies of Scale (Larger firms do better)
3) Control of key resources

- D is downward sloping (normal)
- MR < P
- Operates left of the midpoint (elastic upper range of demand)

MC=MR
- Find revenue max price and continue until you hit demand
- Also when you hit ATC
-Profit= Pmax@d * Qmax

Selling at a different price to different consumers, can be achieved if:
1) Monopoly pricing power exists
2) Able to identify different groups of consumers
3) Able to prevent resale between consumers

1) Large number of firms
2) Differentiated products
3) Easy entry or exit

Demand continues to shift leftward until just tangent under ATC
- DWL equal to triangle: d= ATC,-> d=MC -> MR=MC

1) Few large producers
2) Product can be standard or differentiated
3) Entry barriers
4) Mutual interdependence

Market in which firms purchase the factors of production from households

Change in total cost when an additional unit of a resource is hired, other things constant.
(Usually, MRC= wage)

Demand for industrial products and services is driven by demand for consumer products and services.
- Demand for product rising causes price to rise
- The MRPL goes up, so the hiring of labor at the current wage goes up

- Product demand
- Productivity (affected by:)
1) Quantity of resources
2) Technology progress
3) Quality of variable resources
- Price of other resources
1) Substitute: SE and OE
2) Complement: When machinery and labor are complements, they will have a direct relationship

The change in quantity demanded resulting from a change in the price of one good relative to the price of other goods.
when consumers react to an increase in a good's price by consuming less of that good and more of other goods

Non-rival and non-excludable, consumption available to many

Some people receive benefit regardless of what they gave up

Costs of production that affect people who have no control over how much of a good is produced

- Dprivate will be lower than Dpublic
- Spillover benefits exist at the point where Dpublic meets supply and extends down to Dprivate
- Market price is where Dprivate meets supply

Space between equality and Lorenz curve
-AreaA/(AreaA+AreaB)
- Closer to 0= More equal

- Ability
- Human capital
- Discrimination
- Preferences
- Market power
- Luck and connections

Constant tax rate regardless of income

Tax rate falls as income rises

study of choices individual/businesses make, the way those choices interact in markets, and the influence of governments

1. What to produce?
2. How to produce?
3. For whom to produce?

exchange of giving up one thing to get another

examining the effects of additions/subtractions to a current situation and the trade-offs represented

a testable statement about "what is" or "how something works"

opinionated statement about "what ought to be"

while certain variables change we assume all other things are unchanged--this must be true to be tested for economic analysis

fixed resources, fully employed resources, technology unchanged

giving up one things for another v. the value

Economically: a difference in resources either not equally suited or having different productivity in producing one good compared to another
Mathematically: an increase of opportunity cost as result from differences in resources

the benefits of consuming one more unit of a good/service

when marginal cost is equal to marginal benefit

as the downward slope

causes outward shift

1. number of buyers
2. taste and preferences
3. income
4. expectations of buyers
5. prices of related goods in consumption

a good jointly consumed with another

1. # of sellers
2. change in technology
3. change in resources and input price
4. expectations of producers
5. price of related goods produced

when the abs value of Ed is greater than 1, change in qty is greater than that of price

abs value of Ed is equal to 1

price increases in an inelastic range of demand curve

price increases in an elastic range of demand curve

estimating price elasticity of demand by observing change in total revenue resulting from change in price

How much of a good or service a producer is willing and able to produce at different prices.

Consumer willingness and ability to buy products

A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.

A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

The case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.
Straight vertical line. Quantity will not respond no matter what the change in price is.
price elasticity of demand is zero

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

Ex,y = (%dQd good X) / (%d Price Y). If Ex,y > 0, goods X and Y are substitutes. If Ex,y < 0, goods X and Y are complementary

Income Elasticity of Demand: The income elasticity of demand measures the impact of a consumer's income on his or her demand for a product. If the product is a normal good, the income elasticity of demand will be a positive number; if the product is an inferior good, the income elasticity of demand will be a negative number. If income has a strong impact on the consumer's demand for the product, the income elasticity of demand will be a large number in absolute value; if income has a weak impact on the consumer's demand for the product, the income elasticity of demand will be a small number in absolute value.

A measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

The amount a seller is paid for a good minus the seller's cost of providing it

Consumer Surplus + Producer Surplus

A tax for which the percentage of income paid in taxes increases as income increases

A tax whereby people with lower incomes pay a higher fraction of their income than people with higher incomes.

a tax that is a constant amount (the tax revenue of government is the same) at all levels of GDP

a tax of a specific amount on each unit of a product sold

Ability or capacity of a good or service to be useful and give satisfaction to someone.

the principle that our additional satisfaction, or our marginal utility, tends to go down as more and more units are consumed

the marginal utility from a good that results from spending one more dollar on it

Input costs that require an outlay of money by the firm (e.g. rent). Money that actually leaves a firm in the productive process.

Input costs that do not require an outlay of money by the firm (e.g. interest forgone on money used). The opportunity costs associated with a firm's use of resources that it owns.

Total revenue minus total cost, including both explicit and implicit costs

Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources

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

an input whose quantity the firm can vary at any time

A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.

A period during which at least one of a firm's resources is fixed

shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input

Extra output due to the addition of one more unit of input

Costs that do not vary with the quantity of output produced

Costs that vary with the quantity of output produced

Fixed Cost + Variable Cost

The total cost divided by the quantity produced.

Fixed cost divided by the quantity of output

A curve that indicates the lowest average cost production at each rate output when size or scale of the firm varies. It is also called the planning curve.

A cost that has already been committed and cannot be recovered

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

a firm that has market power in the factor market, i.e., a wage-setter.

something that prevents other firms from entering an industry. Crucial in protecting the profits of a monopolist. There are four types of barriers to entry: control over scarce resources or inputs, increasing returns to scale, technological superiority, and government-created barriers such as licenses.

A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms

markets where individual buyers or sellers can control or influence the price

The percentage of industry sales (or assets, output, labor force, or some other factor) accounted for by x number of firms in the industry.

MR=MC

the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run

An agreement among firms to divide the market, set prices, or limit production

A group of firms that collude by agreeing to restrict output to increase prices and profits.

An approach to evaluating alternative strategies in situations where the outcome of a particular strategy depends on the strategies used by other individuals.

A model used to help show how two interdependent firms may rationally produce where both firms are worse off if collusion does not take place

A strategy that is best for a player in a game regardless of the strategies chosen by the other players

A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

Laws designed to promote competition and fairness to prevent monopolies

The difference between the monopolistic competition output Qmc and the output at minimum ATC. Excess capacity is underused plant and equipment

A level of production in which the marginal product of labor decreases as the number of workers increases; (Gets less additional usefulness)

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

The extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.

The "commons" is any shared resource, including air, water, energy sources, and food supplies. The tragedy occurs when individuals consume more than their share, with the cost of their doing so dispersed among all, causing the ultimate collapse—the tragedy—of the commons.

The difficulty groups face in recruiting when potential members can gain the benefits of the group's actions whether they join or not

A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income.

Average total cost (ATC) is also called average cost or unit cost. Average total costs are a key cost in the theory of the firm because they indicate how efficiently scarce resources are being used. Average variable costs are found by dividing total fixed variable costs by output.

Firms achieve maximum profits when marginal revenue (MR) is equal to marginal cost (MC), that is when the cost of producing one more unit of a good or service is exactly equal to the revenue derived from selling one extra unit.

Productive efficiency occurs when a firm is combining resources in such a way as to produce a given output at the lowest possible average total cost. Costs will be minimized at the lowest point on a firm's short run average total cost curve.
This also means that ATC = MC, because MC always cuts ATC at the lowest point on the ATC curve.

The firm's long run average cost shows what is happening to average cost when the firm expands, and is at a tangent to the series of short run average cost curves. Each short run average cost curve relates to a separate stage or phase of expansion.

In the short run under perfect competition, firms can make super-normal profits or losses.

However, in the long run firms are attracted into the industry if the incumbent firms are making supernormal profits. This is because there are no barriers to entry and because there is perfect knowledge. The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down price until the point where all super-normal profits are exhausted. If firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises price and enables those left in the market to derive normal profits.

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined

undefined