AP Micro Unit 3 Review: Production, Cost, and the Perfect Competition Model
AP Micro Unit 3 covers the production function, short-run and long-run costs, profit concepts, profit maximization at MR = MC, entry and exit, and the full perfect competition model. At 22–25% it is the highest-weighted unit on the exam, and the side-by-side market/firm graph is a perennial FRQ.
What's in Unit 3
- 1The production function and diminishing marginal returns
- 2Short-run production costs (MC, ATC, AVC, AFC)
- 3Long-run production costs and economies of scale
- 4Types of profit: accounting vs economic
- 5Profit maximization (MR = MC)
- 6Firms' entry and exit decisions (shut-down rule)
- 7Perfect competition in the short run and long run
Study this unit free on EconLearn
Short-run production, cost curves, and diminishing returns.
Full lesson, practice questions & flashcards →Price-taking firms, profit maximization at P = MC, and long-run equilibrium.
Full lesson, practice questions & flashcards →What to master for the exam
- Draw the cost-curve family correctly: MC cuts both ATC and AVC at their minimums.
- Apply the shut-down rule: operate if P ≥ AVC; shut down if P < AVC; exit in the long run if P < ATC.
- Draw the side-by-side graph — market on the left sets the price, the firm takes it as a horizontal demand/MR line.
- Explain long-run adjustment: profits attract entry, supply shifts right, price falls to minimum ATC, economic profit returns to zero.
AP Micro Unit 3: common questions
What is on AP Micro Unit 3?
Production and diminishing returns, the full set of short-run cost curves, long-run costs and economies of scale, accounting vs economic profit, profit maximization at MR = MC, the shut-down rule, and the perfect competition model in the short and long run. At 22–25%, it is the highest-weighted unit in AP Micro.
What is the shut-down rule in AP Micro?
In the short run a firm should keep producing as long as price covers average variable cost (P ≥ AVC), because revenue then contributes something toward fixed costs. If P < AVC, shutting down loses only fixed costs, which is better. In the long run, a firm exits if price is below average total cost.