AP Micro Unit 3 - Production, Cost, and the Perfect Competition Model

• The process by which a producer takes inputs (factors of production) and creates an output

• The costs that aren’t affected by the quantity produced

• Examples:

  • Rent

• The costs that are affected by the quantity produced

• Examples:

  • Tomatoes to make pizza sauce

• Total amount of money a firm brings in

• TR = P * Q

• The amount of money a business makes

• Just explicit costs

• Profit, including the opportunity cost

• Explicit and implicit costs

• How much a firm outputs in total

• Example: 2 workers produce 50 units, total is 50

• Divides total product by number of inputs

• Example: 2 workers produce 50 units, average is 25

• Additional output from adding one more input

• Helps us determine when we should stop adding more inputs - zero or negative, we stop

• Example: 2 workers produce 50 units, 3 workers produce 60 units - the 3rd worker’s MP was 10 units

• As we add more inputs, the additional product produced we get from each input will eventually diminish

• Proportional increase in output from an increase in inputs

• Production doubles when input doubles

• Production more than doubles with doubled input

• Production less than doubles with doubled input

• Period of time where at least one input is fixed and cannot change

• Period of time where no variables are fixed

• Explicit costs paid by firms to use resources during the production process

• Sum of both the implicit costs (opportunity costs) and explicit costs of production

• Total cost of producing some quantity of output

• Sum of the variable and fixed costs

  • TC = VC + FC

• Difference of revenue and costs

• Profit = TR - TC

• TC / Q

• AFC + AVC

• VC / Q

• ATC - AFC

• FC / Q

• ATC - AVC

• Additional cost of producing one more unit

flexible

• Short Run Total Cost Curves will shift in the Long Run as more is produced

• Take the lowest average total cost curve at each level of output (short run cost curves)

• In the beginning of production, a factory does not use it’s full plant capacity and mass production is difficult, so there is a high cost producing less quantity

• As the firm continues production, it expands in capacity and can mass produce, lowering ATC

• As the firm expands, its output becomes larger than its plant capacity and is too big to manage, so costs rise again

• Refers to the reduction in total cost-per-unit as a firm increases its production

• In this phase, the firm can reduce the total cost-per-unit by boosting its plant capacity and output

• Refers to the rise in total cost-per-unit as the firm increases its production

• In this phase, the firm would be better off reducing its plant capacity and output to lower per-unit costs

• Between Economies of Scale and Diseconomies of Scale

• In this phase, when the firm increases production, costs stay the same

• ATC is at its lowest

• Blue is Economies of Scale

• Green is Diseconomies of Scale

• Yellow is Constant Returns to Scale

• Blue = Economies of Scale

• Yellow = Constant Returns to Scale

• Green = Diseconomies of Scale

• When economic profit is zero - breaking even

• Our accounting profit is positive

• When revenue is less than costs

• When a firm experiences economic profits in the long run

• The primary goal of any firm, regardless of market structure, is to maximize profits

• MR=MC

• Many, small firms in the industry

• Firms are price takers, and have no control over the price of the goods they sell in the market

  • Market is impacted when firms enter or exit

• Low barriers to entry

• Firms break even in the long run

• Products sold are identical

• No non-price competition

  • All products are identical, so no need for advertising

• Firms are perfectly efficient in the long-run

• ATC and AVC curves are below MR=MC

• ATC curve is above MR=MC, and AVC curve is below MR=MC

• ATC and AVC curves are above MR=MC

• ATC Curve is tangent to MR=DARP where MR=MC

• It is allocatively and productively efficient - perfectly efficient

• The firm should continue to operate as long as the price is equal to or above AVC

leave the industry due to the lack of profit available

enter the industry due to the potential profit available

MR = D = AR = P

• Market equilibrium is equal to marginal revenue

• Supply will shift right

• This will decrease price, driving MR DARP down

• Supply will shift left

• This will increase price, raising MR DARP up

equilibrium, or normal profits