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Unit 3 · Production, Cost & Perfect Competition Unit Hub Flashcards Cheat Sheet Essentials Visual Review MC Practice FRQ Practice

AP Microeconomics Unit 3 Visual Review

An 8-slide visual review of Production, Cost, and the Perfect Competition Model — cost curves, profit maximization, and the shutdown decision, built right into the page.

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UNIT 3 · SLIDE 1 Production & Diminishing Marginal Returns MP of labor Marginal product Workers hired (fixed capital) MP rising MP falling The key formula MP = ΔTotal Product ÷ ΔLabor The extra output added by one more worker. Why MP eventually falls In the SHORT RUN, capital is fixed. Early workers specialize (MP rises), but crowding a fixed workspace means each new worker adds less (MP falls). Short run = at least one input fixed. Long run = ALL inputs variable (plant size can change). Diminishing marginal returns is a short-run law — it's what makes MC eventually rise. The Review Hub · AP Microeconomics Unit 3
With fixed capital, marginal product first rises (specialization) then falls (crowding). This diminishing marginal returns is the reason marginal cost eventually rises — the two curves are mirror images.
UNIT 3 · SLIDE 2 The Cost Curve Family MC ATC AVC Cost per unit Quantity Three rules that always hold 1. MC crosses ATC and AVC at their MINIMUMS 2. MC below average → average falls; above → rises 3. ATC − AVC = AFC, which shrinks as Q grows (fixed cost gets spread over more and more units) The formulas TC = TFC + TVC ATC = TC ÷ Q · AVC = TVC ÷ Q · AFC = TFC ÷ Q MC = ΔTC ÷ ΔQ (= ΔTVC ÷ ΔQ) Grade-saver: fixed cost NEVER affects MC — a change in TFC shifts ATC/AFC only. If you can draw MC crossing ATC and AVC at their minimums, you can answer most Unit 3 MCQs. The Review Hub · AP Microeconomics Unit 3
MC is checkmark-shaped, ATC and AVC are U-shaped, and MC crosses both at their minimum points. The vertical gap between ATC and AVC is AFC, which shrinks as output grows.
UNIT 3 · SLIDE 3 Side-by-Side: Market Sets Price, Firm Takes It Pₑ D S MARKET — sets the price MR = D = AR = P MC Q* FIRM — produces where MR = MC Perfectly competitive firms are price takers — the market price becomes the firm's flat MR line, and the firm produces every unit where MR ≥ MC (stop at MR = MC). The Review Hub · AP Microeconomics Unit 3
Draw the side-by-side graph: the market's S and D set Pₑ, which carries over as the firm's horizontal MR = D = AR = P line. The firm produces at Q*, where MR = MC. This is the #1 FRQ graph in Unit 3.
UNIT 3 · SLIDE 4 Short-Run Economic Profit (P > ATC) Q* MC ATC MR=P P ATC PROFIT Reading the profit rectangle Profit = (P − ATC) × Q* Height: gap between price and ATC at Q* Width: the profit-maximizing quantity Q* Economic vs. accounting profit Accounting profit = revenue − explicit costs Economic profit = revenue − explicit − IMPLICIT costs Zero economic profit = "normal profit" — the firm covers all costs including the owner's next-best option. In the short run, profit attracts entry — see Slide 6. Always find Q* first (MR = MC), THEN compare P to ATC at that quantity — order matters on FRQs. The Review Hub · AP Microeconomics Unit 3
When P > ATC at Q*, the firm earns positive economic profit — the shaded rectangle. Compute it as (P − ATC) × Q*, and always locate Q* with MR = MC before comparing prices.
UNIT 3 · SLIDE 5 Losses & the Shutdown Decision MC ATC AVC shutdown point (minimum AVC) P ≥ ATC → operate at a profit Price covers everything — produce where MR = MC and enjoy the rectangle. AVC ≤ P < ATC → operate at a LOSS Price covers variable costs plus part of fixed costs. Losing less than the full fixed cost of closing. P < min AVC → SHUT DOWN now Every unit sold loses variable cost too. Close and eat only the fixed cost. The firm's short-run supply curve = its MC curve above minimum AVC. The Review Hub · AP Microeconomics Unit 3
Three price zones: P ≥ ATC profit, AVC ≤ P < ATC operate at a loss (still covers some fixed cost), P < min AVC shut down. The MC curve above minimum AVC is the firm's short-run supply curve.
UNIT 3 · SLIDE 6 Long-Run Equilibrium: Zero Economic Profit Q* MC ATC MR=P How entry & exit get us here Short-run PROFITS → firms ENTER → market supply shifts right → price FALLS → profits shrink to zero. Short-run LOSSES → firms EXIT → market supply shifts left → price RISES → losses shrink to zero. Free entry/exit is what forces zero economic profit. In long-run equilibrium… P = MR = MC = minimum ATC • Zero ECONOMIC profit (normal profit remains) • Allocative efficiency: P = MC • Productive efficiency: P = min ATC Zero economic profit isn't failure — owners still earn a normal profit (their opportunity cost). The Review Hub · AP Microeconomics Unit 3
Entry competes profits away; exit erases losses. The long run settles at P = MC = minimum ATC — zero economic profit with both allocative and productive efficiency.
UNIT 3 · SLIDE 7 Perfect Competition — the Model's Assumptions 1 · Many small firms & buyers No single participant is big enough to move the market price on their own. 2 · Identical (homogeneous) products Perfect substitutes — buyers don't care which firm they buy from. Think bushels of wheat. 3 · Free entry and exit No barriers — this is the assumption that drives long-run profit to zero. 4 · Price takers with perfect information Each firm faces a perfectly ELASTIC (horizontal) demand curve at the market price. Why economists love this model: DOUBLE efficiency in the long run Allocative efficiency: P = MC Society gets exactly the quantity it values most Productive efficiency: P = min ATC Output produced at the lowest possible cost per unit Benchmark model: real markets (Unit 4's monopolies & oligopolies) are judged against this standard. The Review Hub · AP Microeconomics Unit 3
Four assumptions: many small firms, identical products, free entry/exit, and price-taking behavior. The payoff: perfect competition delivers both allocative (P = MC) and productive (P = min ATC) efficiency.
UNIT 3 · SLIDE 8 Unit 3 Quick Reference — Know These Cold Cost formulas TC = TFC + TVC · MC = ΔTC ÷ ΔQ ATC = TC ÷ Q · AVC = TVC ÷ Q · AFC = TFC ÷ Q MP = ΔTP ÷ ΔLabor MC crosses ATC & AVC at their minimums Profit rules Produce where MR = MC (always find Q* first) Profit = (P − ATC) × Q* PC firm: P = MR = D = AR (horizontal line) Economic profit subtracts implicit costs too Shutdown ladder P ≥ ATC → profit · AVC ≤ P < ATC → run at loss P < min AVC → shut down immediately SR supply curve = MC above min AVC Fixed costs are sunk in the short run — ignore them Long-run equilibrium P = MR = MC = min ATC → zero economic profit Profits → entry → P falls · Losses → exit → P rises Allocative (P = MC) + productive (P = min ATC) Draw side-by-side market + firm graphs on FRQs Unit 3 is 22–25% of the exam — cost curves and the side-by-side graph are perennial FRQ #1 material. The Review Hub · AP Microeconomics Unit 3
Everything Unit 3 tests in four boxes: cost formulas, the MR = MC profit rule, the shutdown ladder, and long-run zero-profit equilibrium. Master the side-by-side graph — it anchors almost every FRQ.
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How to use the visual review

Spend 30 seconds per step before clicking next. Look at the diagram, then ask yourself: "Could I sketch this from memory and label every part?"

Use the dots below the diagram to jump straight to any step, or the arrow keys to move forward and back.

This is great for review the night before the exam — fast, visual, and covers every core diagram you need to remember from Unit 3.