#AP Microeconomics: Unit 3 Study Guide - Production, Costs, and Perfect Competition

Hey there, future AP Micro master! 🎉 Unit 3 is the heart of microeconomics, and it's where everything starts to click. This guide is designed to help you nail down the core concepts, especially the night before the exam. Let's get started!

#Unit 3: The Producer's World

Unit 3 is foundational for Units 4 & 5. Master it here, and you'll be set for the rest of the course!

#Key Questions for Unit 3:

• How do firms decide what to produce and how much?
• What are the different types of costs, and how do they affect production decisions?
• How do firms maximize their profits?
• What does a perfectly competitive market look like, and how does it function?

#3.1: The Production Function

#Factors of Production

• Land: Natural resources.
• Labor: Human effort.
• Capital: Tools, machinery, and equipment.

#Production Measures

• Total Product (TP): Total output produced by a firm.
• Marginal Product (MP): Additional output from one more unit of input (e.g., labor).
• Average Product (AP): Total product divided by the quantity of input (TP/Q).

#Returns to Scale

• Increasing Returns: Output increases by a larger proportion than the increase in inputs.
• Constant Returns: Output increases by the same proportion as the increase in inputs.
• Decreasing Returns: Output increases by a smaller proportion than the increase in inputs.

Practice Question

If a firm doubles all of its inputs and output more than doubles, the firm is experiencing: A) Decreasing returns to scale B) Constant returns to scale C) Increasing returns to scale D) Diminishing marginal returns Answer: C

The marginal product of labor is: A) The total output divided by the number of workers B) The additional output from hiring one more worker C) The average output per worker D) The total output produced by all workers Answer: B

A company produces widgets using labor and capital. Initially, with 2 workers and 2 machines, they produce 20 widgets. When they increase labor to 3 workers (while keeping capital at 2 machines), their output increases to 27 widgets. When they add a fourth worker (still with 2 machines), their output increases to 32 widgets. (a) Calculate the marginal product of the third worker. (b) Calculate the marginal product of the fourth worker. (c) Explain whether this firm is experiencing diminishing marginal returns and explain why.

(a) 7 widgets (27-20 = 7) - 1 point (b) 5 widgets (32-27=5) - 1 point (c) Yes, the firm is experiencing diminishing marginal returns because the marginal product of the third worker (7) is greater than the marginal product of the fourth worker (5). - 2 points

#3.2: Short-Run Production Costs

#Short-Run vs. Long-Run

• Short-Run: At least one input is fixed (e.g., factory size).
• Long-Run: All inputs are variable.

#Types of Costs

• Fixed Costs (FC): Costs that do not vary with output (e.g., rent).
• Variable Costs (VC): Costs that change with output (e.g., wages, materials).
• Total Cost (TC): Sum of fixed and variable costs: TC = FC + VC

#Per-Unit Costs

• Average Total Cost (ATC): Total cost divided by quantity: ATC = TC / Q
• Average Fixed Cost (AFC): Fixed cost divided by quantity: AFC = FC / Q
• Average Variable Cost (AVC): Variable cost divided by quantity: AVC = VC / Q
• Marginal Cost (MC): Additional cost of producing one more unit.

#Cost Curves

• MC intersects ATC and AVC at their minimum points.
• AFC always decreases as quantity increases.
• ATC and AVC are U-shaped due to diminishing returns.