Microeconomics Unit 3: Costs
and Perfect Competition
questions and answers
Perfect Competition Loss (graph)
Perfect Competition Long Run Equilibrium (graph)
Perfect Competition Profit (graph)
Accounting Profit
Total revenue a firm receives minus its explicit
costs. For example, if a firm sells 100 beach balls
at $2 per ball, then total revenue equals $200. If
the firm spends $125 on labor, capital, and
materials, then the accounting profit equals $200 -
$125 = $75.
Average Fixed Cost (AFC)
, Fixed cost divided by the quantity of a firm's
output. Decreases at decreasing rate as output
rises.
Average Total Cost (ATC)
The sum of average fixed cost and average
variable cost. Total costs incurred divided by
number of units produced. Typically falls and then
rises as output increases.
Average Variable Cost (AVC)
Variable cost divided by the quantity of a firm's
output. Typically falls and then rises as output
increases.
Constant Returns to Scale
This exists when a firm's long-run average total
cost remains constant as the firm's size increases.
Decreasing (Marginal) Returns
This happens when both total product and
marginal product both decrease as an input is
added to the production process.
Diminishing Marginal Returns
This happens when marginal product is decreasing
while total product is still increasing as an input is
added to the production process.
Diseconomies of Scale
This exists when a firm's long-run average total
cost increases as the firm's size increases. The firm
becomes less productively efficient as output rises
and Perfect Competition
questions and answers
Perfect Competition Loss (graph)
Perfect Competition Long Run Equilibrium (graph)
Perfect Competition Profit (graph)
Accounting Profit
Total revenue a firm receives minus its explicit
costs. For example, if a firm sells 100 beach balls
at $2 per ball, then total revenue equals $200. If
the firm spends $125 on labor, capital, and
materials, then the accounting profit equals $200 -
$125 = $75.
Average Fixed Cost (AFC)
, Fixed cost divided by the quantity of a firm's
output. Decreases at decreasing rate as output
rises.
Average Total Cost (ATC)
The sum of average fixed cost and average
variable cost. Total costs incurred divided by
number of units produced. Typically falls and then
rises as output increases.
Average Variable Cost (AVC)
Variable cost divided by the quantity of a firm's
output. Typically falls and then rises as output
increases.
Constant Returns to Scale
This exists when a firm's long-run average total
cost remains constant as the firm's size increases.
Decreasing (Marginal) Returns
This happens when both total product and
marginal product both decrease as an input is
added to the production process.
Diminishing Marginal Returns
This happens when marginal product is decreasing
while total product is still increasing as an input is
added to the production process.
Diseconomies of Scale
This exists when a firm's long-run average total
cost increases as the firm's size increases. The firm
becomes less productively efficient as output rises
