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AP MICROECONOMICS UNIT #3
THE FIRM
GEORGIA PERFORMANCE STANDARDS IN THIS UNIT
SSEMI4 The student will explain the organization and role of business and analyze
the four types of market structures in the U.S. economy.
a. Compare and contrast three forms of business organization—sole proprietorship,
partnership, and corporation.
b. Explain the role of profit as an incentive for entrepreneurs.
c. Identify the basic characteristics of monopoly, oligopoly, monopolistic competition,
and pure competition.
COLLEGE BOARD STANDARDS IN THIS UNIT
I. Basic Economic Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8–14%)
F. Marginal analysis
II. The Nature and Functions of Product Markets. . . . . . . . . . . . . . .. (55–70%)
C. Production and costs (10–15%)
1.
Production functions: short and long run
2.
Marginal product and diminishing returns
3.
Short-run costs
4.
Long-run costs and economies of scale
5.
Cost minimizing input combination and productive
efficiency
D.
Firm behavior and market structure (25–35%)
1. Profit
a. Accounting versus economic profits
b. Normal profit
c. Profit maximization: MR=MC rule
2. Perfect competition
a. Profit maximization
b. Short-run supply and shutdown decision
c. Behavior of firms and markets in the short run and in
the long run
d. Efficiency and perfect competition
3. Monopoly
a. Sources of market power
b. Profit maximization
c. Inefficiency of monopoly
d. Price discrimination
e. Natural monopoly
4. Oligopoly
a. Interdependence, collusion, and cartels
b. Game theory and strategic behavior
c. Dominant strategy
d. Nash equilibrium
5. Monopolistic competition
a. Product differentiation and role of advertising
b. Profit maximization
c. Short-run and long-run equilibrium
d. Excess capacity and inefficiency
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READING ASSIGNMENTS
1. Chapter 4 : pp. 68-69.
2. Chapter 20: pp. 378-384.
3. Chapter 20: pp. 384-389.
4. Chapter 20: pp. 389-396.
5. Chapter 21: pp. 399-409.
LECTURES
1. The Production Function.
2. Costs in the Short-Run.
3. Costs in the Long-Run.
4. Introduction to Perfect Competition.
5. Short-Run and Long-Run Per.
Comp.
6. Introduction to Monopoly.
TEXTBOOK STUDY QUESTIONS
1. Chapter 20: 2, 4, 7, 10.
2. Chapter 21: 3, 4, 6, 7.
6.
7.
8.
9.
10.
Chapter 21:
Chapter 22:
Chapter 22:
Chapter 23:
Chapter 23:
pp.
pp.
pp.
pp.
pp.
409-420.
423-436.
436-441.
444-450.
451-464.
7. Monopoly charts/graphs.
8. Inefficiency of
monopoly/regulation.
9. Monopolistic Competition.
10. Oligopoly #1.
11. Oligopoly #2.
3. Chapter 22: 4, 5, 6, 12.
4. Chapter 23: 2,7, 8, 9, 11.
PROJECTS
TBA
UNIT GRAPHS
See handout
REFLECTION PAPERS
See handout
QUIZZES
1. Business organizations. (15)
2. Production Function. (16)
3. Basics of costs. (17)
4. Revenue/Cost/Profit for Perfect
Competition. (18)
5. Computing Revenue/Cost/Profit
from Graphs. (19)
6. Perfect Competition FRQ. (20)
7. Basics of Monopoly. (21)
8. Monopoly graph interpret. (22)
9. Natural/regulated monopoly and
price discrimination. (23)
10. Monopoly FRQ. (24)
11. Monopolistic competition. (25)
12. Oligopoly demand curve. (26)
13. Game theory. (27)
14. Market structures review. (28)
TEST PRACTICE
1. Sample Multiple Choice.
2. Sample Free Response.
TESTS
Unit Test #3
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OBJECTIVES
1. Explain the relationship between marginal cost and marginal product and marginal cost
and AVC and ATC.
2. List and analyze the differences between the four major market structures.
3. Explain the tendency towards break-even in the long-run in perfect competition.
4. Explain entry barriers that keep competitors out of industries controlled by monopolies.
5. Explain the gap between marginal revenue and price in noncompetitive markets.
6. Explain how elasticity of the demand curve determines output and pricing in a monopoly.
7. Analyze why noncompetitive markets are less efficient than perfect competition.
8. Identify and analyze pricing problems associated with an oligopoly.
VOCABULARY
economic cost
explicit cot
implicit cost
normal profit
economic profit
total product (TP or Q)
Marginal product (MP)
Average product (AP)
Law of diminishing returns
fixed costs (TFC)
variable costs (TVC)
total cost (TC)
Average fixed cost (AFC)
Average Variable Cost (AVC)
Average Total Cost (ATC)
Marginal Cost (MC)
sole proprietorship
partnership
corporation
horizontal merger
vertical merger
conglomerate
stock/bond
economies of scale
constant returns to scale
diseconomies of scale
natural monopoly
perfect competition
monopolistic competition
oligopoly
monopoly
price taker
price maker
average revenue (AR)
marginal revenue (MR)
total revenue (TR)
break-even point
shut-down point
MR=MC rule
Increasing-cost industry
Constant-cost industry
Decreasing-cost industry
collusion
cartel
allocative efficiency
deadweight loss
rent-seeking
price discrimination
fair-return pricing
marginal cost pricing
nonprice competition
excess capacity
homogeneous oligopoly
differentiated oligopoly
mutual interdependence
concentration ratio
Herfindhal index
game theory
dominant strategy
Nash Equilibrium
kinked demand curve
GRAPH/CHART/APPLICATION SKILLS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Compute marginal product and average product from a table and a graph.
Compute TFC, TVC, TC, AFC, ATC, and MC from a table and from a graph.
Identify cost and production curves on a graph.
Interpret long-run ATC graphs.
Compute price, quantity, total revenue, average revenue, and marginal revenue from a
table and a graph for all market structures.
Identify profit, break-even, loss, and shutdown from total cost/total revenue curves and
from average cost/average revenue curves from all market structures.
Determine the profit-maximizing output level in all four market structures.
Analyze how changes in the industry of a product changes cost and revenue for the firms
in that industry (in all market structures).
Identify different output and price levels for a monopoly under government regulation.
Identify the deadweight loss from a monopoly on a graph.
Compute and analyze Herfindhal index figures for different industries.
Interpret a profit payoff matrix for an oligopoly.
Interpret the kinked demand curve of an oligopoly.
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