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🏭MICROECONOMICS STUDY GUIDE

Production, Costs, and Profit

Connect marginal product with short-run cost curves, revenue, and the firm's output decision.

8 key ideas8 flashcards5 practice questions
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EXAM SCOPEOpenStax Principles of Microeconomics 3e, production and costs

This review follows the current course framework.

Checked against OpenStax Principles of Microeconomics 3e ↗
MARGINAL CHECK

The next unit tells the firm whether to produce more.

MR > MC

another unit adds profit

MR = MC

output stopping rule

MR < MC

the last unit costs too much

SMART NOTES

Key ideas to know

Start with the relationships between ideas. Then close the notes and explain each one from memory.

  1. 01

    Economic profit subtracts explicit and implicit opportunity costs from revenue.

  2. 02

    Fixed cost does not vary with short-run output.

  3. 03

    Variable cost rises or falls with the amount produced.

  4. 04

    Marginal cost is the added total cost of one more unit.

  5. 05

    Average total cost equals total cost divided by output.

  6. 06

    Diminishing marginal product makes marginal cost rise after enough variable input is added to a fixed input.

  7. 07

    Marginal cost crosses average variable cost and average total cost at their minimum points.

  8. 08

    A firm raises output while marginal revenue exceeds marginal cost and stops where the two are equal under regular conditions.

PART OF THE MICROECONOMICS GUIDE

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COMMON MIX-UPS

Two ideas worth correcting now

NOT QUITE

Fixed cost affects the profit-maximizing output rule

→
USE THIS INSTEAD

Marginal cost and marginal revenue determine output; fixed cost affects profit totals.

NOT QUITE

Accounting profit and economic profit are the same

→
USE THIS INSTEAD

Economic profit also subtracts implicit opportunity costs.

ACTIVE RECALL

Flashcards

Answer before opening each card. The effort to retrieve is part of the learning.

1What is economic profit?Show answer ＋

Revenue minus explicit and implicit opportunity costs.

2What is marginal cost?Show answer ＋

The added total cost from one more unit.

3What is average fixed cost?Show answer ＋

Fixed cost divided by output.

4Why does average fixed cost fall?Show answer ＋

The same fixed cost is spread across more units.

5Where does MC cross ATC?Show answer ＋

At ATC's minimum.

6What does diminishing marginal product do to MC?Show answer ＋

It tends to push MC upward.

7What output rule maximizes profit?Show answer ＋

Produce where marginal revenue equals marginal cost, subject to shutdown and market conditions.

8What is a sunk cost?Show answer ＋

A past cost that cannot be recovered and should not determine the current decision.

PRACTICE QUESTIONS

Explain it in your own words

Use the answer as a check after you have written or spoken your response.

01Why can accounting profit exceed economic profit?

Accounting profit omits implicit opportunity costs.

02Why does MC below ATC pull ATC down?

The next unit costs less than the current average.

03What happens when MC rises above ATC?

The added unit costs more than the current average, so ATC rises.

04Why should sunk cost be ignored?

It is identical across current alternatives and cannot be recovered.

05How does marginal product relate to marginal cost?

When each extra worker produces less output, more labor is needed per added unit, raising marginal cost.

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