Firms' Short and Long-Run Decisions - AP Microeconomics

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

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

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

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

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

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

Firm breaks even. Zero economic profit condition achieved.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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