Production, Cost, and the Perfect Competition Model (22%-25%)
Image from Pixabay
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
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).
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.
Total Costs (not required to draw this for the exam, but you will want to know it)
Average Total Cost (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!
Long-Run Average Total Cost (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 economic profit 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 economic profit equals zero. There’s economic profit, which is different from Mr. Moneybags and his accounting profit. You want economic profit 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.
3.5 Profit Maximization
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.
Average Total Cost (expanded)
3.6 Firms’ Short-Run Decisions to Produce and Long-Run Decisions to Enter and Exit a Market
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.
Average Total Cost (Shutdown Rule)
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.
Perfect Competition Market Structure (Market and Firm) (you are required to understand, draw, and manipulate these graphs)
Good luck, and here we go into Unit 3!