Microeconomics Study Guide: Production, Costs, and Competitive Markets (Chapters 5–8)

Study Guide - Smart Notes

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Price Consumption Curve (PCC): The locus of optimal consumption bundles as the price of one good changes, holding income and other prices constant.
Income Consumption Curve (ICC): The set of optimal consumption bundles as income changes, holding prices constant.
Engel Curve: A curve showing the relationship between income and quantity demanded of a good.
Substitution Effect: The change in quantity demanded due to a change in the good's price, holding utility constant.
Income Effect: The change in quantity demanded resulting from a change in real income due to a price change.
Total Effect: The sum of substitution and income effects from a price change.

Production Function: Shows the maximum output obtainable from given inputs. Example: , where is labor and is capital.
Economic Profit: Total revenue minus total economic cost (explicit and implicit costs).
Accounting/Business Profit: Total revenue minus explicit costs only.
Implicit Cost: The opportunity cost of using resources owned by the firm.
Explicit Cost: Actual monetary payments for inputs.
Fixed Input: An input whose quantity cannot be changed in the short run.
Variable Input: An input whose quantity can be changed in the short run.
Short Run: Period in which at least one input is fixed.
Long Run: Period in which all inputs can be varied.
Marginal Product of Labor (MPL): Additional output from one more unit of labor.
Marginal Product of Capital (MPK): Additional output from one more unit of capital.
Average Product of Labor (APL): Output per unit of labor.
Average Product of Capital (APK): Output per unit of capital.
Isoquant: Curve showing all combinations of inputs that yield the same output.
Marginal Rate of Technical Substitution (MRTS): The rate at which one input can be substituted for another, holding output constant.
Constant Returns to Scale: Output increases by the same proportion as all inputs.
Increasing Returns to Scale: Output increases by a greater proportion than inputs.
Decreasing Returns to Scale: Output increases by a smaller proportion than inputs.

Total Cost (C): Sum of all costs incurred in production.
Fixed Cost (FC): Costs that do not vary with output.
Variable Cost (VC): Costs that vary with output.
Average Fixed Cost (AFC):
Average Variable Cost (AVC):
Average Total Cost (AC or ATC):
Marginal Cost (MC): The increase in total cost from producing one more unit.
Isocost: Line showing all combinations of inputs that cost the same. (where is wage, is rental rate of capital)
Expansion Path: The locus of cost-minimizing input combinations as output increases.
Economies of Scale: Long-run average cost decreases as output increases.
Diseconomies of Scale: Long-run average cost increases as output increases.
Learning by Doing: Costs decrease as cumulative output increases due to experience.

Competitive Market: Many buyers and sellers, homogeneous product, free entry and exit.
Profit Maximization Condition: Firms maximize profit where (marginal revenue equals marginal cost).
Residual Demand Curve: The market demand not met by other firms at a given price.
Average Revenue (AR): Revenue per unit sold.
Marginal Revenue (MR): Additional revenue from selling one more unit.
Shut-down Rule: In the short run, a firm should shut down if .
Short-run Market Supply: The sum of all firms' supply at each price, given fixed number of firms.
Long-run Market Supply: The sum of all firms' supply at each price, allowing for entry and exit.
Exit Point: The price below which firms will exit the market in the long run.
Residual Supply Curve: The supply available to a market after accounting for other markets.
Long-run Competitive Equilibrium: Occurs when firms earn zero economic profit and no incentive exists for entry or exit.

Demand curves can be derived from the price consumption curve by plotting the quantity demanded at each price.

Normal Good: Quantity demanded increases as income increases.
Inferior Good: Quantity demanded decreases as income increases.
Giffen Good: An inferior good for which the income effect outweighs the substitution effect, causing quantity demanded to rise as price rises.
Use the income consumption curve to distinguish between these goods.

Economic profit includes both explicit and implicit costs; accounting profit includes only explicit costs.

Relationship among total, marginal, and average product curves illustrates diminishing returns.
Isoquants are analogous to indifference curves in consumer theory.

Determined by analyzing the production function's response to proportional increases in all inputs.

Firms choose input combinations where the marginal product per dollar is equalized across inputs:

Changes in input prices shift isocost lines and alter the cost-minimizing input combination.

Individual firm faces perfectly elastic demand; market demand is downward sloping.

Entry occurs when firms earn positive economic profit; exit occurs when firms incur losses.

Depends on input prices and entry/exit; can be horizontal (constant cost), upward sloping (increasing cost), or downward sloping (decreasing cost).

Review homework problems and class quizzes/examples for application of concepts.
Prepare a one-page, double-sided handwritten cheat sheet with key formulas and definitions.
Bring a calculator, pencil, and eraser to the exam (no phones allowed).

Cost Concept	Definition	Formula
Total Cost (C)	Sum of all production costs
Average Total Cost (AC)	Cost per unit of output
Marginal Cost (MC)	Cost of producing one more unit
Average Fixed Cost (AFC)	Fixed cost per unit
Average Variable Cost (AVC)	Variable cost per unit

Some formulas and relationships (e.g., ) relate to elasticity in market analysis.
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