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Home Cost Analysis Short Run and Long Run Cost Curves

Short Run and Long Run Average Cost Curves:

 

Relationship and Difference:

 

Short Run Average Cost Curve:

 

In the short run, the shape of the average total cost curve (ATC) is U-shaped. The, short run average cost curve falls in the beginning, reaches a minimum and then begins to rise. The reasons for the average cost to fall in the beginning of production are that the fixed factors of a firm remain the same. The change only takes place in the variable factors such as raw material, labor, etc.

 

As the fixed cost gets distributed over the output as production is expanded, the average cost, therefore, begins to fall. When a firm fully utilizes its scale of operation (plant size), the average cost is then at its minimum. The firm is then operating to its optimum capacity. If a firm in the short-run increases its level of output with the same fixed plant; the economies of that scale of production change into diseconomies and the average cost then begins to rise sharply.

 

Long Run Average Cost Curve:

 

In the long run, all costs of a firm are variable. The factors of production can be used in varying proportions to deal with an increased output. The firm having time-period long enough can build larger scale or type of plant to produce the anticipated output. The shape of the long run average cost curve is also U-shaped but is flatter that the short run curve as is illustrated in the following diagram:

 

Diagram/Figure:

 

 

 

In the diagram 13.7 given above, there are five alternative scales of plant SAC1 SAC2, SAC3, SAC4 and, SAC5. In the long run, the firm will operate the scale of plant which is most profitable to it.

 

For example, if the anticipated rate of output is 200 units per unit of time, the firm will choose the smallest plant It will build the scale of plant given by SAC1 and operate it at point A. This is because of the fact that at the output of 200 units, the cost per unit is lowest with the plant size 1 which is the smallest of all the four plants. In case, the volume of sales expands to 400, units, the size of the plant will be increased and the desired output will be attained by the scale of plant represented by SAC2 at point B, If the anticipated output rate is 600 units, the firm will build the size of plant given by SAC3 and operate it at point C where the average cost is $26 and also the lowest The optimum output of the firm is obtained at point C on the medium size plant SAC3.

 

If the anticipated output rate is 1000 per unit of time the firm would build the scale of plant given by SAC5 and operate it at point E. If we draw a tangent to each of the short run cost curves, we get the long average cost (LAC) curve. The LAC is U-shaped but is flatter than tile short run cost curves. Mathematically expressed, the long-run average cost curve is the envelope of the SAC curves.

 

In this figure 13.7, the long-run average cost curve of the firm is lowest at point C. CM is the minimum cost at which optimum output OM can be, obtained.

Relevant Articles:

Concept of Cost of Production
Concepts of Economic Costs

Analysis of Short Run Cost of Production

Average Cost
Short Run and Long Run Average Cost Curves
Marginal Cost
Relation of Average Variable Cost and Average Total Cost to Marginal Cost
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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