AP Microeconomics
(Modules 55,56, pgs 567-570 in Module 57, 58-60)
Test on Tuesday 3/24/15
Test Checklist
Note: Review multiple-choice questions at the end of every
module and additional multiple-choice questions provided with
on line resources that come with the book.
Modules 55 –Production Costs in the Short Run
Study Activity 31
1. Understand the relationship between total cost, average cost and marginal
cost curves. Be able to identify each of these curves on a graph and explain
why the marginal cost intersects the average cost curves at their minimum
points.
2. The marginal product curves and marginal cost curves are mirror images
of each other – marginal costs in the short run begin to increase because of
diminishing returns to input.
3. Fixed costs – remain constant over all levels of output
--Average Fixed Costs – decrease with output as the overhead gets
spread over a greater number of units produced.
Module 56
Study Module 56 Reading Questions
1. Long –Run Production Costs – all inputs and costs are variable.
--Economies of Scale, Constant Returns to Scale, Diseconomies of
Scale.
Modules 57 (pgs. 567-570), 58, 59 and 60 – Perfect Competition
Study Reading Questions on Perfect Competition
1.) Know the characteristics of Perfect Competition (P.C.) (pg. 568-570)
2.) Know the difference between the industry’s supply and demand curves
and the individual firm’s.
3.) Perfectly Competitive (P.C.) firms maximize profits by producing the last
unit where MR > = MC. (This is called the Optimal Output Rule). For P.C.,
since MR=Price, we can restate this to say Price >=MC.
4.) P.C. has a perfectly elastic demand curve – understand the significance of
this.
5.) Understand why the P.C. firm’s supply curve is the marginal cost curve
above the minimum average variable cost (AVC).
6.) In the short-run, a P.C. firm that is producing can make profits, minimize
losses or break-even. A P.C. will continue to produce (and not shut down)
in the short-run as long as its price per unit is greater than or equal to the
AVC. This is the same as saying it will operate as long as it makes enough
total revenue to pay for its variable costs, or its losses are equal but not
greater than its fixed costs.
7.) Understand why P.C. firms must break-even in the long-run (Price
=ATC). Know what the graph for a P.C. firm at long-run equilibrium looks
like.
8.) Be able to define allocative efficiency (producing a mix of goods most
desired by consumers, which occurs where price = MC) and productive
efficiency (producing in a least costly manner, which occurs where Price =
min. ATC)
9.) Know why the P.C. firm is allocatively efficient in the short-run and long
run, and productively efficient only in the long-run.