AP Microeconomics Production, Cost, and the Perfect Competition ModelModule 3 Note Guide Termsdefine each in your own way. Accounting profit: Allocative efficiency: Average cost: Average product: Constant cost industry: Decreasing cost industry: Diseconomies of scale (decreasing returns): Division of labor: Economic loss: Economic profit: Economies of scale (increasing returns): Efficient scale (constant returns): Fixed cost: Fixed input: Law of diminishing marginal returns: Long run: Long-run average total cost: Marginal cost: Marginal product: Market concentration: Minimum efficient scale: Normal profit: Operate: Perfect competition:

Price taker: Production function: Productive efficiency: Productivity: Profit-maximizing rule: Profit: Short run: Shut down rule: Specialization: Sunk cost: Theory of the firm: Total product: Variable cost: Variable input:

Visualizations and Calculations Production Function for Stuff, Inc. Input (Number of Workers)

Output 0 0 1 5 2 10 3 20 4 35 5 55 6 65 7 75 8 75 9 70 10 60 What is the maximum total output for Stuff, Inc.? What is the average product of 5 workers? Which number of workers maximizes Stuff, Inc.'s marginal product? Explain. Graph the total product curve for Stuff, Inc. Shade the areas of increasing, decreasing, and negative marginal returns.

Short Run Cost Analysis for Stuff, Inc. Complete the chart.

Output Fixed Cost

Variable Cost

Total Costs Marginal Cost Average Fixed Cost Average Variable Cost Average Total Cost 0 $5 0 $5 - - - - 1 $3 $8 $3 $5 $3 $8 2 $5 $10 $2 3 $6 4 $8 5 $11 6 $18 7 $35 8 $80

Stuff, Inc. charges $10 for one unit of stuff. At what level of output does Stuff, Inc. maximize profit? Explain.

Long-Run Production of Stuff, Inc. Now assume you know none of the data above. Draw an accurately labeled long-run production cost graph. Identify the following: Long-run average total cost, LRATC Minimum efficient scale, MES, at point Qmin and Pmin Shade and label the areas of economies of scale, efficient scale, and diseconomies of scale

Perfect Competition for Stuff, Inc. Assume Stuff, Inc. is a perfectly competitive firm in a constant-cost industry that is earning economic profit. Draw an accurately labeled graph of the market for stuff and for the firm Stuff, Inc.: Identify the profit-maximizing price, Pm. Identify the profit-maximizing output, Qm. Shade the area of economic profit.

Long-Run Profit Analysis of Stuff, Inc. Other firms see Stuff, Inc. earning a profit and decide to enter the market for stuff. Illustrate the impact of this change in the market on your graphs above.

What happens to the economic profit of Stuff, Inc.? Explain.

Why do perfectly competitive firms earn zero economic profit in the long run? Explain.

In the long run, is Stuff, Inc. earning accounting profit? Explain.

If firms keep entering the market for stuff, at what point would Stuff, Inc. decide to shut down? Explain.