AP EconomicsOctober 21, 2014

1. Finish Unit II Exam Review2. Begin Unit 3: Theory of the Firm3. Lesson 3-1: Introduction to Market Structures

w/Video4. Return Work

Theory of the Firm Introduction

• 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 3-1Introduction 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• 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 Costs

•Economic Profit =Total Revenue – Economic Costs

October 24, 2014

1.Collect Current Event2.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 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/Service2.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.

LO2

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

1 10

2 25

3 45

4 60

5 70

6 75

7 75

8 70

7-10

LO2

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 -

1 10 10

2 25 15

3 45 20

4 60 15

5 70 10

6 75 5

7 75 0

8 70 -5

7-11

LO2

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 - -

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

7-12

Short Run Per Unit Production Costs

• Average Fixed Costs AFC = TFC/Q

• Average Variable Costs AVC = TVC/Q

• 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 EconomicsOctober 27, 2014

1. Finish Lesson on Cost Curves2. Activity 3-3: Cost Curves Practice3. Review Activities 3-2 and 3-3 tomorrow4. Quiz tomorrow on Lessons 3-1 and 3-2

• Output FC VC TC AFC AVC ATC MC

• 0 $500 $ 0 $500• 1 500 200 700• 2 500 300 800• 3 500 420 920 • 4 500 580 1,080• 5 500 800 1,300• 6 500 1200 1,700• 7 500 1900 2,400

Cost Curves

• Output FC VC TC AFC AVC ATC MC

• 0 500 0 500 0

• 1 500 200 700 500 • 2 500 300 800 250 • 3 500 420 920 167 • 4 500 580 1080 125 • 5 500 800 1300 100 • 6 500 1200 1700 83 • 7 500 1900 2400 71

Cost Curves• Output FC VC TC AFC AVC ATC MC• 0 500 0 500 0 0 • 1 500 200 700 500 200 • 2 500 300 800 250 150 • 3 500 420 920 167 140 • 4 500 580 1080 125 145 • 5 500 800 1300 100 160 • 6 500 1200 1700 83 200 • 7 500 1900 2400 71 271

Cost Curves• Output FC VC TC AFC AVC ATC MC• 0 500 0 500 0 0 0 • 1 500 200 700 500 200 700 • 2 500 300 800 250 150 400 • 3 500 420 920 167 140 307 • 4 500 580 1080 125 145 270 • 5 500 800 1300 100 160 260 • 6 500 1200 1700 83 200 283 • 7 500 1900 2400 71 271 343

Cost Curves• Output FC VC TC AFC AVC ATC MC• 0 500 0 500 0 0 0 0• 1 500 200 700 500 200 700 200• 2 500 300 800 250 150 400 100• 3 500 420 920 167 140 307 120• 4 500 580 1080 125 145 270 160• 5 500 800 1300 100 160 260 220• 6 500 1200 1700 83 200 283 400 • 7 500 1900 2400 71 271 343 700

Cost Curve Analysis

• 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 3-32. Quiz: Lessons 3-1 and 3-2