Firms' Short and Long-Run Decisions - AP Microeconomics

1. What is the normal profit condition?

   Zero economic profit, where TR = TC. Earning just enough to cover all costs.

2. What does 'productive efficiency' mean?

   Producing at the lowest possible cost. Minimizes cost for any given output level.

3. Which cost is considered when deciding to shut down in the short run?

   Average Variable Cost. Fixed costs are sunk, only variable costs matter.

4. State the long-run entry decision condition for a firm.

   Enter if price exceeds average total cost. Price above ATC ensures positive economic profit.

5. What is an economic profit?

   Total Revenue minus Total Costs (explicit and implicit). Includes opportunity costs of all resources.

6. What happens if marginal cost is greater than marginal revenue?

   Reduce production to maximize profit. MC > MR means additional units reduce profit.

7. What is the role of fixed costs in short-run decisions?

   Fixed costs are irrelevant to the shutdown decision. Must pay fixed costs regardless of production.

8. What outcome occurs if average total cost equals price?

   Firm breaks even. Zero economic profit condition achieved.

9. What is the definition of a firm's short-run production decision?

   Decide output level when some inputs are fixed. Distinguishes short-run from long-run by input flexibility.

10. How does a firm determine profit maximization?

    Produce where Marginal Cost = Marginal Revenue. Equalizes marginal benefit and marginal cost.

11. What does the term 'economies of scale' mean?

    Cost advantages as output increases. Average costs fall as production increases.

12. What is the implication of a price taker in perfect competition?

    Firm accepts market price without influence. Cannot influence market price through output changes.

13. State the shutdown condition in the short run for a firm.

    Shutdown if price is less than average variable cost. Below AVC, firm can't cover variable costs.

14. What is the formula for total cost (TC)?

    $TC = \text{Fixed Costs} + \text{Variable Costs}$. Sum of fixed and variable costs.

15. What condition indicates a firm should exit the market?

    When price is consistently less than average total cost. Persistent losses indicate unprofitable operation.

16. What does 'diseconomies of scale' refer to?

    Increased cost per unit when output increases. Average costs rise as production increases.

17. What does 'allocative efficiency' mean?

    Resources are distributed according to consumer preferences. Price reflects marginal cost of production.

18. What is the impact of technological change on costs?

    Can lower costs and shift cost curves downward. Innovation reduces production costs over time.

19. What is the role of marginal cost in production decisions?

    MC influences optimal output where MC = MR. Profit maximization occurs at MC = MR intersection.

20. What is the breakeven point for a firm?

    Point where Total Revenue = Total Costs. No economic profit or loss at this point.

21. What is the efficient scale of a firm?

    Output level where average total cost is minimized. Minimum point on average total cost curve.

22. What is the meaning of 'sunk cost' in production?

    Irrecoverable costs already incurred. Cannot be recovered, irrelevant to future decisions.

23. How do external economies of scale affect a firm?

    Lower costs due to industry growth. Industry-wide cost reductions benefit individual firms.

24. Identify the formula for marginal cost (MC).

    MC = $\frac{\text{Change in Total Cost}}{\text{Change in Quantity}}$. Change in total cost per additional unit.

25. What is the significance of the marginal revenue (MR)?

    MR is the additional revenue from selling one more unit. Measures revenue gained from each additional unit.

26. How is long-run average cost (LRAC) determined?

    LRAC is the lowest cost at which a firm can produce any given level of output. Envelope of all short-run average cost curves.

27. What is the accounting profit?

    Total Revenue minus explicit costs only. Excludes opportunity costs, only actual payments.

28. What is the role of capital in long-run production decisions?

    Capital is a variable cost in the long run. All inputs adjustable in long-run decisions.

29. What is the formula for average variable cost (AVC)?

    AVC = $\frac{\text{Variable Costs}}{\text{Quantity}}$. Variable costs divided by output quantity.

30. What is the relationship between average cost and economies of scale?

    Average cost decreases as output increases. Defines the economies of scale relationship.

31. Identify the formula for average fixed cost (AFC).

    AFC = $\frac{\text{Fixed Costs}}{\text{Quantity}}$. Fixed costs spread over quantity produced.

32. What is the term for when a firm can cover all variable costs only?

    Operating at a loss but not shutting down. Covers variable costs but not all fixed costs.

33. What is the definition of a firm's long-run decision?

    Decide to enter/exit based on all inputs being variable. Distinguishes long-run by complete input flexibility.

34. State the long-run exit decision condition for a firm.

    Exit if price is less than average total cost. Price below ATC results in economic losses.

35. What is the formula for average total cost (ATC)?

    ATC = $\frac{\text{Total Costs}}{\text{Quantity}}$. All costs divided by output quantity.

36. What determines a firm's supply curve in perfect competition?

    Portion of the marginal cost curve above AVC. Only produces when price covers variable costs.

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