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AP Economics October 21, 2014 1.Finish Unit II Exam Review 2.Begin Unit 3: Theory of the Firm 3.Lesson 3-1: Introduction to Market Structures w/Video 4.Return.

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Presentation on theme: "AP Economics October 21, 2014 1.Finish Unit II Exam Review 2.Begin Unit 3: Theory of the Firm 3.Lesson 3-1: Introduction to Market Structures w/Video 4.Return."— Presentation transcript:

1 AP Economics October 21, 2014 1.Finish Unit II Exam Review 2.Begin Unit 3: Theory of the Firm 3.Lesson 3-1: Introduction to Market Structures w/Video 4.Return Work

2 Theory of the Firm Introduction 35-50% of AP Micro Exam: The Heart of Microeconomics. Theory of the Firm: Concept that states that firms make decisions in order to maximize profits. Goes along with the theory of the consumer: that consumers seek to maximize their overall utility. What does a firm do? Produces Good/Service in attempt to earn the largest possible Total Profit. So firm wants its resources to be highly productive and efficient to have lowest costs and compete with similar products. Must consider Demand for its products and decide what price to charge. TO MAXIMIZE ITS TOTAL PROFIT, A FIRM MUST DECIDE ON OPTIMAL QUANTITY TO PRODUCE AND PRICE TO CHARGE.

3 Lesson 3-1 Introduction to Market Structures Firms operate in 1 of 4 possible MARKET STRUCTURES. Each market structure has different products with different degrees of competition. Basic profit maximization concept applies to all! Q: What is the difference between Apples sold at a Farmer’s Market and Comcast Cable TV? Q: What is the difference between homogenous and differentiated products? Q: What is the difference between perfect competition and monopolistic competition? Q: Is monopolistic competition closer to monopoly or perfect competition? What are some examples of barriers to entry? What is the distinguishing characteristic of a monopoly?

4 October 22, 2014 1.Finish Market Structures w/Video Clip: Market Structures 2.Begin Lesson 3-2: Production and Cost

5 Economic Costs All firms face costs… Economic Costs: Payments that must be made to obtain and retain the services of a resource. All resources used by a firm have an opportunity cost. Explicit Costs: Monetary payments it makes to buy resources. Wages, Interest, Rent, Capital. Fixed Costs: costs that are independent of output (rent, buildings, machinery) Variable Costs: Costs that vary with output (wages, utilities, materials used in production) Explicit Costs (Total Cost) = Total Fixed Costs (TFC) + Total Variable Costs (TVC) Implicit Costs: Cost that is represented by lost opportunity in the use of a company's own resources. Economic Costs= E.C. + I.C

6 Profits Accounting profit = Revenue – Explicit Costs Economic Profit =Total Revenue – Economic Costs

7 October 24, 2014 1.Collect Current Event 2.Continue Lesson 3-2: SR/LR, Measures of Productivity, SR Per-Unit Costs & Curves 3.Quiz on Unit 3 Lessons 3-1,3-2 Tuesday, October 28. 4.HW: Activity 3-2

8 Short Run and Long Run in Production Short Run: A Key factor of production (resource, input) is fixed (capital) while other inputs are variable (labor.) Long Run: All inputs/resources/factors are variable Firms enter and exit the market NEITHER IS A SPECIFIC TIME PERIOD!

9 Short Run Measures of Productivity Three productivity measures: 1.Total Product (TP): Total Output of Good/Service 2.Average Physical Product (AP): This is a measure of labor productivity: TP/Units of Labor 3.Marginal Physical Product (MP): Change in TP/Change in Unit of Labor Law of Diminishing Productivity: In SHORT RUN, as firms provide more of a variable input with a fixed input, the MP of the variable input eventually declines.

10 LO2 Total, Marginal, and Average Product: The Law of Diminishing Returns (1) Units of the Variable Resource (Labor) (2) Total Product (TP) (3) Marginal Product (MP) (4) Average Product (AP) 00 110 225 345 460 570 675 7 870 7-10

11 LO2 Total, Marginal, and Average Product: The Law of Diminishing Returns (1) Units of the Variable Resource (Labor) (2) Total Product (TP) (3) Marginal Product (MP) (4) Average Product (AP) 00- 110 22515 34520 46015 57010 6755 7 0 870-5 7-11

12 LO2 Total, Marginal, and Average Product: The Law of Diminishing Returns (1) Units of the Variable Resource (Labor) (2) Total Product (TP) (3) Marginal Product (MP) (4) Average Product (AP) 00-- 110 10.00 2251512.50 3452015.00 4601515.00 5701014.00 675512.50 775010.71 870-58.75 7-12

13 Short Run Per Unit Production Costs Average Fixed Costs AFC = TFC/Q Average Variable Costs AVC = TVC/Q Average Total Costs ATC = TC/Q Marginal Costs MC = ΔTC/ΔQ These cost curves on a graph form the foundation for the analysis of short-run, profit-maximizing production by a firm!

14 AP Economics October 27, 2014 1.Finish Lesson on Cost Curves 2.Activity 3-3: Cost Curves Practice 3.Review Activities 3-2 and 3-3 tomorrow 4.Quiz tomorrow on Lessons 3-1 and 3-2

15 Output FC VC TC AFC AVC ATC MC 0 $500 $ 0 $500 1 500 200 700 2 500 300 800 3 500 420 920 4 500 580 1,080 5 500 800 1,300 6 500 1200 1,700 7 500 1900 2,400

16 Cost Curves Output FC VC TC AFC AVC ATC MC 0 500 0 500 0 1 500 200 700 500 2 500 300 800 250 3 500 420 920 167 4 500 580 1080 125 5 500 800 1300 100 6 500 1200 1700 83 7 500 1900 2400 71

17 Cost Curves Output FC VC TC AFC AVC ATC MC 0 500 0 500 0 0 1 500 200 700 500 200 2 500 300 800 250 150 3 500 420 920 167 140 4 500 580 1080 125 145 5 500 800 1300 100 160 6 500 1200 1700 83 200 7 500 1900 2400 71 271

18 Cost Curves Output FC VC TC AFC AVC ATC MC 0 500 0 500 0 0 0 1 500 200 700 500 200 700 2 500 300 800 250 150 400 3 500 420 920 167 140 307 4 500 580 1080 125 145 270 5 500 800 1300 100 160 260 6 500 1200 1700 83 200 283 7 500 1900 2400 71 271 343

19 Cost Curves Output FC VC TC AFC AVC ATC MC 0 500 0 500 0 0 0 0 1 500 200 700 500 200 700 200 2 500 300 800 250 150 400 100 3 500 420 920 167 140 307 120 4 500 580 1080 125 145 270 160 5 500 800 1300 100 160 260 220 6 500 1200 1700 83 200 283 400 7 500 1900 2400 71 271 343 700

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21 Cost Curve Analysis AFC Curve: Constantly Decreasing ATC ALWAYS lies above AVC MC, ATC, AVC are ALWAYS U-Shaped Small quantities of output= Increasing Marginal Returns Larger quantities of output = Diminishing Marginal Returns MC Looks like Nike Swoosh MC ALWAYS intersects AVC at its LOWEST point- Basic law of averages. When AVC is declining, MC is less than AVC; When AVC is increasing, MC is greater than AVC. MC ALWAYS intersects ATC at its LOWEST point also. Each intersection is at a different quantity- remember gap between ATC and AVC is AFC

22 October 28, 2014 1.Review HW Activities 3-2 and 3-3 2.Quiz: Lessons 3-1 and 3-2

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