AP Economics
October 21, 2014
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4.
Finish Unit II Exam Review
Begin Unit 3: Theory of the Firm
Lesson 3-1: Introduction to Market Structures w/Video
Return Work
Theory of the Firm
Introduction
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35-50% of AP Micro Exam: The Heart of
Microeconomics.
Theory of the Firm: Concept that states
that firms make decisions in order to
maximize profits.
Goes along with the theory of the
consumer: that consumers seek to
maximize their overall utility.
What does a firm do?
Produces Good/Service in attempt to
earn the largest possible Total Profit.
So firm wants its resources to be highly
productive and efficient to have lowest
costs and compete with similar
products.
Must consider Demand for its products
and decide what price to charge.
TO MAXIMIZE ITS TOTAL PROFIT, A
FIRM MUST DECIDE ON OPTIMAL
QUANTITY TO PRODUCE AND PRICE
TO CHARGE.
Lesson 3-1
Introduction to Market Structures
• Firms operate in 1 of 4 possible MARKET STRUCTURES.
• Each market structure has different products with different
degrees of competition.
• Basic profit maximization concept applies to all!
• Q: What is the difference between Apples sold at a Farmer’s
Market and Comcast Cable TV?
• Q: What is the difference between homogenous and
differentiated products?
• Q: What is the difference between perfect competition and
monopolistic competition?
• Q: Is monopolistic competition closer to monopoly or perfect
competition?
• What are some examples of barriers to entry?
• What is the distinguishing characteristic of a monopoly?
October 22, 2014
1.Finish Market Structures
w/Video Clip: Market
Structures
2.Begin Lesson 3-2: Production
and Cost
Economic Costs
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All firms face costs…
Economic Costs: Payments that must be made to obtain and retain the
services of a resource.
All resources used by a firm have an opportunity cost.
Explicit Costs: Monetary payments it makes to buy resources.
Wages, Interest, Rent, Capital.
Fixed Costs: costs that are independent of output (rent, buildings, machinery)
Variable Costs: Costs that vary with output (wages, utilities, materials used in
production)
Explicit Costs (Total Cost) = Total Fixed Costs (TFC) + Total Variable
Costs (TVC)
Implicit Costs: Cost that is represented by lost opportunity in the use of a
company's own resources.
Economic Costs= E.C. + I.C
Profits
• Accounting profit = Revenue – Explicit
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Costs
Economic Profit =Total Revenue –
Economic Costs
October 24, 2014
1. Collect Current Event
2. Continue Lesson 3-2: SR/LR, Measures
of Productivity, SR Per-Unit Costs &
Curves
3. Quiz on Unit 3 Lessons 3-1,3-2 Tuesday,
October 28.
4. HW: Activity 3-2
Short Run and Long Run in
Production
• Short Run:
• A Key factor of production (resource, input) is
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fixed (capital) while other inputs are variable
(labor.)
Long Run:
All inputs/resources/factors are variable
Firms enter and exit the market
NEITHER IS A SPECIFIC TIME PERIOD!
Short Run Measures of Productivity
• Three productivity measures:
1. Total Product (TP): Total Output of Good/Service
2. Average Physical Product (AP): This is a
measure of labor productivity: TP/Units of Labor
3. Marginal Physical Product (MP): Change in
TP/Change in Unit of Labor
• Law of Diminishing Productivity: In SHORT
RUN, as firms provide more of a variable input with
a fixed input, the MP of the variable input eventually
declines.
Total, Marginal, and Average Product: The Law of Diminishing Returns
(1)
Units of the
Variable Resource
(Labor)
(2)
Total Product (TP)
0
0
1
10
2
25
3
45
4
60
5
70
6
75
7
75
8
70
LO2
(3)
Marginal Product
(MP)
(4)
Average Product
(AP)
7-10
Total, Marginal, and Average Product: The Law of Diminishing Returns
(1)
Units of the
Variable Resource
(Labor)
(2)
Total Product (TP)
(3)
Marginal Product
(MP)
0
0
-
1
10
10
2
25
15
3
45
20
4
60
15
5
70
10
6
75
5
7
75
0
8
70
-5
LO2
(4)
Average Product
(AP)
7-11
Total, Marginal, and Average Product: The Law of Diminishing Returns
(1)
Units of the
Variable Resource
(Labor)
(2)
Total Product (TP)
(3)
Marginal Product
(MP)
(4)
Average Product
(AP)
0
0
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-
1
10
10
10.00
2
25
15
12.50
3
45
20
15.00
4
60
15
15.00
5
70
10
14.00
6
75
5
12.50
7
75
0
10.71
8
70
-5
8.75
LO2
7-12
Short Run Per Unit Production Costs
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Average Fixed Costs AFC = TFC/Q
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Average Variable Costs AVC = TVC/Q
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Average Total Costs ATC = TC/Q
• Marginal Costs MC = ΔTC/ΔQ
• These cost curves on a graph form the foundation for
the analysis of short-run, profit-maximizing
production by a firm!
AP Economics
October 27, 2014
1.
2.
3.
4.
Finish Lesson on Cost Curves
Activity 3-3: Cost Curves Practice
Review Activities 3-2 and 3-3 tomorrow
Quiz tomorrow on Lessons 3-1 and 3-2
• Output
FC
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0
$500
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1
500
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2
500
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3
500
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4
500
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5
500
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6
500
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7
500
VC
$0
200
300
420
580
800
1200
1900
TC
$500
700
800
920
1,080
1,300
1,700
2,400
AFC
AVC
ATC
MC
Cost Curves
• Output
FC
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0
500
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1
500
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2
500
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3
500
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4
500
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5
500
•
6
500
•
7
500
VC
0
200
300
420
580
800
1200
1900
TC
500
700
800
920
1080
1300
1700
2400
AFC
0
500
250
167
125
100
83
71
AVC
ATC
MC
Cost Curves
• Output
FC
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0
500
•
1
500
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2
500
•
3
500
•
4
500
•
5
500
•
6
500
•
7
500
VC
0
200
300
420
580
800
1200
1900
TC
500
700
800
920
1080
1300
1700
2400
AFC
0
500
250
167
125
100
83
71
AVC
0
200
150
140
145
160
200
271
ATC
MC
Cost Curves
• Output
FC
•
0
500
•
1
500
•
2
500
•
3
500
•
4
500
•
5
500
•
6
500
•
7
500
VC
0
200
300
420
580
800
1200
1900
TC
500
700
800
920
1080
1300
1700
2400
AFC
0
500
250
167
125
100
83
71
AVC
0
200
150
140
145
160
200
271
ATC
0
700
400
307
270
260
283
343
MC
Cost Curves
• Output
FC
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0
500
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1
500
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2
500
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3
500
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4
500
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5
500
•
6
500
•
7
500
VC
0
200
300
420
580
800
1200
1900
TC
500
700
800
920
1080
1300
1700
2400
AFC
0
500
250
167
125
100
83
71
AVC
0
200
150
140
145
160
200
271
ATC
0
700
400
307
270
260
283
343
MC
0
200
100
120
160
220
400
700
Cost Curve Analysis
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AFC Curve: Constantly Decreasing
ATC ALWAYS lies above AVC
MC, ATC, AVC are ALWAYS U-Shaped
Small quantities of output= Increasing Marginal
Returns
Larger quantities of output = Diminishing Marginal
Returns
MC Looks like Nike Swoosh
MC ALWAYS intersects AVC at its LOWEST point- Basic
law of averages.
When AVC is declining, MC is less than AVC; When AVC
is increasing, MC is greater than AVC.
MC ALWAYS intersects ATC at its LOWEST point also.
Each intersection is at a different quantity- remember
gap between ATC and AVC is AFC 
October 28, 2014
1. Review HW Activities 3-2 and 3-3
2. Quiz: Lessons 3-1 and 3-2