AP Micro Econ Unit 9

Profit Formula

Total Revenue - Total Cost

Total Opportunity Cost Formula

Total explicit cost+ total implicit cost

What does it mean if your total revenue is higher than the sum of your implicit and explicit costs?

Operating your business is better than another activity.

What does it mean if your total revenue is lower than the sum of your implicit and explicit costs?

Another activity aside from your business is better for your time and resources.

What is the optimal output rule?

Profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

What is the principle of marginal analysis?

Every activity should continue until marginal benefit equals marginal cost.

Marginal Revenue Formula

Change in total revenue/change in qty of output

What is the optimal output rule?

Profit is maximized by producing the qty of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

Grpah showing marginal revenue curve, marginal cost curve, and optimal output.

What is the production function?

The relationship between the qty of outputs a firm uses and the qty of output it produces

What is the relationship between quantity and the long run?

All inputs can be varied

What is the relationship between quantity and the short run?

At least one input is fixed

Total Product Curve

Marginal Product of Labor Formula

Change in qty/change in labor

Marginal product of labor graph

Total Cost Curve

Marginal Cost Formula

Change in total cost/ Change in qty of output

Marginal Cost Curve

Average Cost formula

total cost/qty of output

Average Total Cost Curve

Average Fixed Cost Formula

Fixed cost/ qty of output

Average variable cost formula

Variable cost/ qty of output

What is the spreading effect

The larger the output, the greater the qty of output over which fixed cost is spread, leading to a lower average fixed cost.

What is the diminishing returns effect?

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

Graph with mcc, atc, avc, afc

What is the minimum cost output

The qty of output at which avg total cost is lowest, it corresponds to the bottom of the U shaped average total cost curve.

What are the three general principles that are always true about a firm’s marginal cost and average total cost curves?

1. At the minimum cost, average total cost is equal to marginal cost

2. At output less than the minimum cost of output, marginal cost is less than average total cost and average total cost is falling

3. At output greater than the minimum cost of output, marginal cost is greater than atc, and atc is rising

What is the actual curvature of the mcc?

It curves downward as a firm increases its production from zero up to some low level, sloping upward only at higher levels of production.

What is the actual curvature of the atc?

It is U shaped, mcc goes through the min point of atc

What is the actual curvature of the avc?

It’s U shaped

What is the actual curvature of the average fixed cost curve?

Backwards exponential

Average fixed cost curve

When do low fixed costs yield lower average total cost?

At low output levels

When do high fixed costs yield higher average total cost?

At high output levels

Graph that shows lratc, economies and diseconomies of scale

What determines the shape of the lratc?

Returns to scale