A look inside the firm. Production functions, short-run and long-run costs, types of profit, the MR=MC profit-maximizing rule, and how firms behave under perfect competition in the short run and long run.
Seven topics from the College Board CED, in order.
Topic 3.1
The Production Function
Total, average, and marginal product in the short run, and the law of diminishing marginal returns.
Topic 3.2
Short-Run Production Costs
Fixed cost, variable cost, total cost, and their average and marginal counterparts — and how they relate to each other.
Topic 3.3
Long-Run Production Costs
Economies and diseconomies of scale, and how the long-run average total cost curve is built from many short-run curves.
Topic 3.4
Types of Profit
Accounting profit vs. economic profit, and explicit vs. implicit costs.
Topic 3.5
Profit Maximization
The MR = MC rule that maximizes profit (or minimizes loss) for any firm, in any market structure.
Topic 3.6
Perfect Competition in the Short Run
Firm and market graphs, the shutdown decision, and short-run profit or loss for a price-taking firm.
Topic 3.7
Perfect Competition in the Long Run
Entry and exit drive economic profit to zero, and the resulting long-run equilibrium is both productively and allocatively efficient.
About Unit 3
Unit 3 shifts the lens from the overall market (Units 1–2) to the individual firm. You'll learn how a firm's production function — the relationship between inputs and output — gives rise to its cost structure, and why marginal cost eventually rises due to diminishing marginal returns.
The unit's central tool is the MR = MC profit-maximizing rule: a firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. You'll apply this rule to the perfectly competitive firm — a price-taker that faces a horizontal demand curve — in both the short run (where profit or loss can persist) and the long run (where entry and exit drive economic profit to exactly zero).
This unit is roughly 22–25% of the AP Micro exam — nearly as heavily weighted as Unit 2 — and takes about 16–18 class periods. Fluency with cost curve graphs (ATC, AVC, MC, and where they intersect) is essential, since perfect competition is the baseline every other market structure in Unit 4 will be compared against.
Cost Structure
Diminishing returns shape the marginal cost curve, which drives all other cost curves
Profit Maximization
Every firm, in every market structure, maximizes profit where MR = MC