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Introduction to Unit 3

4 min readdecember 6, 2021

Hope Myers

Hope Myers

Hope Myers

Hope Myers

Production, Cost, and the Perfect Competition Model (22%-25%)

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-RgOB8Wc9KEbJ.png?alt=media&token=688d94a5-6897-4861-a4a9-15bde986b3d7

Image from Pixabay

WARNING! Unit 3 is the make-or-break unit for your AP Micro score. It’s really two major units and demands you to take it seriously. If you want a 3 or above, you must master the concepts in Unit 3. This isn’t the toughest unit of Micro, but it’s a steep step from Unit 2. Unit 1 is Minecraft on Peaceful: fun and engaging. Unit 2 is Mass Effect, some tricky spots but fine once you get the hang of it. Unit 3 is the Dark Souls of AP Micro. It’s hard, and you are going to work really hard. DO NOT GIVE UP! Schedule time to review every night and plan to join us on #Micro at the 5able Discord to ask questions and practice. You’ll dominate Unit 3, but now you know it’ll take some time. I’m including the graphs learned for each section as a quick reference for you.

3.1 The Production Function

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-8KZz2BBAzvjw.jpeg?alt=media&token=0460ef21-f2fa-40da-9647-650a2ed1defb

Image from Pixabay

We’ve all heard the idiom, “too many cooks in the kitchen.” If there are too many people trying to get a task done, they end up slowing the work down because people are getting in each other’s way. In this section, you are going to learn how to assess the value of each additional employee (i.e. Marginal Product). 

Graph Learned: 

Total Production Graph (a graph you will most likely forget by the time we finish Unit 3. REVIEW NEEDED!) 

3.2 Short-Run Production Costs

Here it is. If I were to pinpoint the exact moment where a student’s budding economics career gets derailed, I’d point at 3.2. It’s deceptively tough and will be a part of this course until the last gasp of Unit 6. If you find yourself lost later, come back to 3.2. You’ll find your footing.

Graphs Learned: 

Total Costs (not required to draw this for the exam, but you will want to know it) 

(you are required to understand, draw, and manipulate this graph)

3.3 Long-Run Production Costs 

The next layer of production costs. What happens to costs when businesses introduce mass production techniques? The Long-Run happens. The long-run foresees the production of a good beyond short-run fixed costs. How many cookies could you make if you had a bigger factory and industrial ovens? Long-run gives you a moment to dream and then realize that costs drop once you start buying in bulk, but if you continue to produce more, the costs will creep up again!   

Graph Learned

(you are required to understand, draw, and manipulate this graph)

3.4 Types of Profit

Don’t let this breath of fresh air throw you for a loop. In this section, you’ll learn that zero doesn’t mean people in a business aren’t stacking papers and making bank. In other words, people are still able to pay employees and themselves when equals zero. There’s , which is different from Mr. Moneybags and his . You want equaling zero, because that means you have exhausted every opportunity to make profit. In Florida, we’d say you’ve squeezed every drop of juice out of the orange. 

Graph Learned: 

None.

3.5 Profit Maximization

MR=MC. 

It’s a philosophy. A way of life. A life-changing moment. Be sure to live your precious life with the goal to live it MR=MC. The point where Marginal Revenue is equal to Marginal Cost is where the last penny of profit is scooped up. You will have used every opportunity and gained all life has for you. Beyond MR=MC, the cost outweighs the benefits. Remind yourself MR=MC when you sit down to study before a Micro test in school. Pulling an all-nighter will cost you more than spending an hour or two reviewing and then getting a good night’s sleep. You might pass out during the test or play terribly at practice after a night of chaotic study. If a friend starts teasing you when you are going to bed, tell them that your Marginal Cost is now equal to your Marginal Revenue. If they don’t understand that reference, maybe it’s for the best that they pull the all-nighter and study! You will sleep with confidence. 

Graph Learned: 

(expanded) 

3.6 Firms’ Short-Run Decisions to Produce and Long-Run Decisions to Enter and Exit a Market

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-xb00hPy6emJ6.jpeg?alt=media&token=921abb7f-5ee0-4905-a703-ed4a50266e44

Image from Pixabay

Winter is coming. You aren’t a Stark, but you do own a water park. You know you need to close for the season at some point but when? Which day? Which hour? How do you extract the last dollar of profit before you close down for the season? That’s the short-run. Do you add a rollercoaster in the offseason and enter the theme park market in the next summer? That’s a long-run decision. 

Graphs Learned: 

()

3.7 Perfection Competition 

One day, AP will combine 3.7 and Unit 4 and just call it Market Structures, but today is not that day. 3.7 is big. It’s a big concept and requires careful attention to a lot of material. Make sure you know this market structure well before you take on Imperfect Competition in Unit 4. 

Graphs Learned: 

Market Structure (Market and Firm) (you are required to understand, draw, and manipulate these graphs)

Good luck, and here we go into Unit 3! 

Key Terms to Review (14)

Accounting Profit

: Accounting profit is the financial measure that represents the difference between a company's total revenue and its explicit costs (such as wages, rent, and materials). It is calculated by subtracting explicit costs from total revenue.

Average Total Cost

: Average total cost (ATC) is obtained by dividing total cost by the quantity produced. It represents the average cost per unit of output and includes both fixed and variable costs.

Economic profit

: Economic profit refers to the total revenue earned by a firm minus both explicit and implicit costs. It measures the profitability of a business after considering all costs, including opportunity costs.

Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter and Exit a Market

: Firms make short-run decisions about whether or not to produce based on whether their total revenue covers their variable costs. In the long run, firms decide whether or not to enter or exit a market based on whether their total revenue covers both their variable and fixed costs.

Long-Run Average Total Cost

: The long-run average total cost refers to the average cost per unit of output when all inputs can be varied. It takes into account both fixed and variable costs.

Long-run Production Costs

: Long-run production costs refer to the expenses incurred by a firm for producing goods or services when all factors of production are variable and can be adjusted. In this time frame, there are no fixed inputs, allowing firms to optimize their production process and minimize costs.

Marginal Cost (MC)

: Marginal cost refers to the additional cost incurred by a firm when producing one more unit of a good or service. It takes into account the change in total cost divided by the change in quantity produced.

Marginal Revenue (MR)

: Marginal revenue refers to the additional revenue generated from selling one more unit of a product. It is calculated by dividing the change in total revenue by the change in quantity sold.

Perfect Competition

: Perfect competition describes an idealized market structure where there are many buyers and sellers who have perfect information about prices and products. In this type of market, no single buyer or seller has the power to influence prices.

Production Function

: A production function is a mathematical representation that shows the relationship between inputs (such as labor and capital) and outputs (such as goods or services) produced by a firm. It demonstrates how much output can be produced with different combinations of inputs.

Profit Maximization

: Profit maximization refers to the process of determining the level of output that will generate the highest possible profit for a firm, taking into account both costs and revenues.

Short-run Production Costs

: Short-run production costs refer to the expenses incurred by a firm for producing goods or services within a limited time frame where some factors of production are fixed (e.g., capital). These costs include both variable costs (costs that change with the level of production) and fixed costs (costs that do not change with the level of production).

Shutdown Rule

: The shutdown rule states that a firm should shut down production in the short run if its total revenue is less than its variable costs. In other words, it is more cost-effective for the firm to stop producing rather than continue operating at a loss.

Types of Profit

: Types of profit refer to different ways businesses can earn income beyond their expenses. There are three types - economic profit, accounting profit, and normal profit.

Introduction to Unit 3

4 min readdecember 6, 2021

Hope Myers

Hope Myers

Hope Myers

Hope Myers

Production, Cost, and the Perfect Competition Model (22%-25%)

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-RgOB8Wc9KEbJ.png?alt=media&token=688d94a5-6897-4861-a4a9-15bde986b3d7

Image from Pixabay

WARNING! Unit 3 is the make-or-break unit for your AP Micro score. It’s really two major units and demands you to take it seriously. If you want a 3 or above, you must master the concepts in Unit 3. This isn’t the toughest unit of Micro, but it’s a steep step from Unit 2. Unit 1 is Minecraft on Peaceful: fun and engaging. Unit 2 is Mass Effect, some tricky spots but fine once you get the hang of it. Unit 3 is the Dark Souls of AP Micro. It’s hard, and you are going to work really hard. DO NOT GIVE UP! Schedule time to review every night and plan to join us on #Micro at the 5able Discord to ask questions and practice. You’ll dominate Unit 3, but now you know it’ll take some time. I’m including the graphs learned for each section as a quick reference for you.

3.1 The Production Function

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-8KZz2BBAzvjw.jpeg?alt=media&token=0460ef21-f2fa-40da-9647-650a2ed1defb

Image from Pixabay

We’ve all heard the idiom, “too many cooks in the kitchen.” If there are too many people trying to get a task done, they end up slowing the work down because people are getting in each other’s way. In this section, you are going to learn how to assess the value of each additional employee (i.e. Marginal Product). 

Graph Learned: 

Total Production Graph (a graph you will most likely forget by the time we finish Unit 3. REVIEW NEEDED!) 

3.2 Short-Run Production Costs

Here it is. If I were to pinpoint the exact moment where a student’s budding economics career gets derailed, I’d point at 3.2. It’s deceptively tough and will be a part of this course until the last gasp of Unit 6. If you find yourself lost later, come back to 3.2. You’ll find your footing.

Graphs Learned: 

Total Costs (not required to draw this for the exam, but you will want to know it) 

(you are required to understand, draw, and manipulate this graph)

3.3 Long-Run Production Costs 

The next layer of production costs. What happens to costs when businesses introduce mass production techniques? The Long-Run happens. The long-run foresees the production of a good beyond short-run fixed costs. How many cookies could you make if you had a bigger factory and industrial ovens? Long-run gives you a moment to dream and then realize that costs drop once you start buying in bulk, but if you continue to produce more, the costs will creep up again!   

Graph Learned

(you are required to understand, draw, and manipulate this graph)

3.4 Types of Profit

Don’t let this breath of fresh air throw you for a loop. In this section, you’ll learn that zero doesn’t mean people in a business aren’t stacking papers and making bank. In other words, people are still able to pay employees and themselves when equals zero. There’s , which is different from Mr. Moneybags and his . You want equaling zero, because that means you have exhausted every opportunity to make profit. In Florida, we’d say you’ve squeezed every drop of juice out of the orange. 

Graph Learned: 

None.

3.5 Profit Maximization

MR=MC. 

It’s a philosophy. A way of life. A life-changing moment. Be sure to live your precious life with the goal to live it MR=MC. The point where Marginal Revenue is equal to Marginal Cost is where the last penny of profit is scooped up. You will have used every opportunity and gained all life has for you. Beyond MR=MC, the cost outweighs the benefits. Remind yourself MR=MC when you sit down to study before a Micro test in school. Pulling an all-nighter will cost you more than spending an hour or two reviewing and then getting a good night’s sleep. You might pass out during the test or play terribly at practice after a night of chaotic study. If a friend starts teasing you when you are going to bed, tell them that your Marginal Cost is now equal to your Marginal Revenue. If they don’t understand that reference, maybe it’s for the best that they pull the all-nighter and study! You will sleep with confidence. 

Graph Learned: 

(expanded) 

3.6 Firms’ Short-Run Decisions to Produce and Long-Run Decisions to Enter and Exit a Market

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2F-xb00hPy6emJ6.jpeg?alt=media&token=921abb7f-5ee0-4905-a703-ed4a50266e44

Image from Pixabay

Winter is coming. You aren’t a Stark, but you do own a water park. You know you need to close for the season at some point but when? Which day? Which hour? How do you extract the last dollar of profit before you close down for the season? That’s the short-run. Do you add a rollercoaster in the offseason and enter the theme park market in the next summer? That’s a long-run decision. 

Graphs Learned: 

()

3.7 Perfection Competition 

One day, AP will combine 3.7 and Unit 4 and just call it Market Structures, but today is not that day. 3.7 is big. It’s a big concept and requires careful attention to a lot of material. Make sure you know this market structure well before you take on Imperfect Competition in Unit 4. 

Graphs Learned: 

Market Structure (Market and Firm) (you are required to understand, draw, and manipulate these graphs)

Good luck, and here we go into Unit 3! 

Key Terms to Review (14)

Accounting Profit

: Accounting profit is the financial measure that represents the difference between a company's total revenue and its explicit costs (such as wages, rent, and materials). It is calculated by subtracting explicit costs from total revenue.

Average Total Cost

: Average total cost (ATC) is obtained by dividing total cost by the quantity produced. It represents the average cost per unit of output and includes both fixed and variable costs.

Economic profit

: Economic profit refers to the total revenue earned by a firm minus both explicit and implicit costs. It measures the profitability of a business after considering all costs, including opportunity costs.

Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter and Exit a Market

: Firms make short-run decisions about whether or not to produce based on whether their total revenue covers their variable costs. In the long run, firms decide whether or not to enter or exit a market based on whether their total revenue covers both their variable and fixed costs.

Long-Run Average Total Cost

: The long-run average total cost refers to the average cost per unit of output when all inputs can be varied. It takes into account both fixed and variable costs.

Long-run Production Costs

: Long-run production costs refer to the expenses incurred by a firm for producing goods or services when all factors of production are variable and can be adjusted. In this time frame, there are no fixed inputs, allowing firms to optimize their production process and minimize costs.

Marginal Cost (MC)

: Marginal cost refers to the additional cost incurred by a firm when producing one more unit of a good or service. It takes into account the change in total cost divided by the change in quantity produced.

Marginal Revenue (MR)

: Marginal revenue refers to the additional revenue generated from selling one more unit of a product. It is calculated by dividing the change in total revenue by the change in quantity sold.

Perfect Competition

: Perfect competition describes an idealized market structure where there are many buyers and sellers who have perfect information about prices and products. In this type of market, no single buyer or seller has the power to influence prices.

Production Function

: A production function is a mathematical representation that shows the relationship between inputs (such as labor and capital) and outputs (such as goods or services) produced by a firm. It demonstrates how much output can be produced with different combinations of inputs.

Profit Maximization

: Profit maximization refers to the process of determining the level of output that will generate the highest possible profit for a firm, taking into account both costs and revenues.

Short-run Production Costs

: Short-run production costs refer to the expenses incurred by a firm for producing goods or services within a limited time frame where some factors of production are fixed (e.g., capital). These costs include both variable costs (costs that change with the level of production) and fixed costs (costs that do not change with the level of production).

Shutdown Rule

: The shutdown rule states that a firm should shut down production in the short run if its total revenue is less than its variable costs. In other words, it is more cost-effective for the firm to stop producing rather than continue operating at a loss.

Types of Profit

: Types of profit refer to different ways businesses can earn income beyond their expenses. There are three types - economic profit, accounting profit, and normal profit.


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AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.


© 2024 Fiveable Inc. All rights reserved.

AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.