5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

So Which Should I Use?

This is an excellent question. The “quickie” answer is to turn to the title page of this book,

and use that method. Of course, as a student of economics, you must include implicit

economic costs in calculating economic profit. But why? Well, it’s more accurate. An adept

student of economics knows that the cost of something goes beyond the price tag. A friend

of mine in graduate school once said that “nothing is free; it is just non-priced.” If you visit

your AP teacher’s office, you might not have to pay to pass through the door, but you could

be doing something else with your time. This is a non-priced economic cost. Molly’s labor

and effort at the lemonade stand appear to be free; this is why an accountant does not

include that effort in calculating profit. An economist knows that it is not free—it is just

non-priced. An economist tries to quantify that price by using the value of Molly’s efforts

in her next best alternative as the banker. Throughout this book, costs refer to economic

costs, and profits refer to economic profits.

Short-Run and Long-Run Decisions

The short run is a time when at least one production input is fixed and cannot be changed

to respond to a change in product demand. During the holiday season a local gift shop

extends hours and increases the workers hired. Much more difficult to change is the total

capacity of the shop. The capacity of the shop is fixed in the short run but can be altered

with enough time. The amount of time required to change the plant size is known as the

long run. In other words, all inputs are variable in the long run. See Table 8.1.

Table 8.1

PLANT SIZE ENTRY/EXIT OF

(CAPITAL) FIXED COSTS VARIABLE COSTS FIRMS

Short Run Fixed Some Some No

Long Run Variable None All Yes

Example:

When Molly pays $25 for a monthly vendor’s license on January 1, she is commit-

ted for a month. She cannot receive a refund if she fails to operate the lemonade

stand, and she does not have to pay more if she works 24 hours a day all month.

For Molly, the long run is one month. On the other hand, at any point in the

month, Molly can choose to purchase more lemons, cups, or sugar, or employ

assistants if she is selling more cups of lemonade. This is a short-run decision.

8.2 Production and Cost

Main Topics: Short-Run Production Functions, Law of Diminishing Marginal Returns, Short-

Run Costs, Bridge over (Troubling) Economic Waters, Long-Run Costs, Economies of Scale

Short-Run Production Functions

How do economic resources like labor, capital, natural resources, and entrepreneurial

talent become a cup of lemonade, or a ton of copper, or a 30-second television commer-

cial? A production functionis the mechanism for combining production resources, with

existing technology, into finished goods and services. In other words, a production

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