Scribd
Upload
468 views18 pages

Behaviour of Short Run Curves

The document discusses the behavior of short-run and long-run average and marginal costs. In the short-run, average fixed cost decreases continuously as output increases while average variable cost initially decreases and then increases, leading to the characteristic U-shape of the average total cost curve. In the long-run, the firm can vary all inputs and chooses the optimal plant size based on the level of output, resulting in a flatter U-shaped long-run average cost curve. The long-run marginal cost curve is also flatter U-shaped and intersects the long-run average cost curve at its minimum.

Uploaded by

shashwat shukla
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
468 views18 pages

Behaviour of Short Run Curves

The document discusses the behavior of short-run and long-run average and marginal costs. In the short-run, average fixed cost decreases continuously as output increases while average variable cost initially decreases and then increases, leading to the characteristic U-shape of the average total cost curve. In the long-run, the firm can vary all inputs and chooses the optimal plant size based on the level of output, resulting in a flatter U-shaped long-run average cost curve. The long-run marginal cost curve is also flatter U-shaped and intersects the long-run average cost curve at its minimum.

Uploaded by

shashwat shukla
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 18

BEHAVIOURS OF SHORT-RUN COST CURVE

⚫ AFC decrease as the output increases.


⚫ Since the total fixed cost remain the same, average fixed costs
decline continuously. It is the outcome of “spreading the
overhead over more units”.
⚫ Since AFC = TFC/Q, it is the pure arithmetical result with the
numerator remaining unchanged, the increasing denomination
causes a diminishing product.
⚫ TFC thus spreads over each unit of output with the increase in
output (Q).
⚫ Hence,
⚫ AFC diminishes continuously.
⚫ AVC first decreases and then increases as the output increases.

⚫ ATC also decreases initially. It remains constant at a point for a


while, but then goes on increasing as output increase.
⚫ Marginal Cost (MC) also decreases initially but then increases as
the output is increased.
⚫ The MC is determined by the rate of increase in the total variable
cost (TVC). In the beginning, for the very first unit, thus average
variable cost and marginal cost are the same (because AVC = TVC
for the first unit).
⚫ When the average cost is minimum, MC = AC.
BEHAVIOUR OF SHORT
RUN AVERAGE COST CURVE
‘U’ shaped ATC or AC curve

⚫ ATC = AFC + ATC, it follows that the behavior of the ATC


curve is determined by the AVC curve and AFC Curve.
⚫ The AFC curve is rectangular hyperbola, which implies that
the average, fixed cost diminishes continuously as output
expands.
⚫ The AVC curve also slopes downward initially.
⚫ The ATC curve tends to fall when output expands. At a
certain point, however, the AVC starts rising, so the AVC
cure has a positive slope yet the ATC curve continues to fall.
⚫ The predominant influence of the falling AFC Curve. Since the
falling effect AFC is stronger than the rising effect of AFC curve,
the net effect causes ATC to fall.

⚫ As the output expands further to a higher level the AVC curve


tends to rise sharply due to the operation of the law of
diminishing returns.

⚫ The rising effect of AVC being predominant, it more than


discounts the falling effect of AFC curve, so the net effect is that
the ATC starts risings.

⚫ At the point where AVC exactly nullifies the fall of AFC it causes
balancing effect.
⚫ For ATC to remain constant first when the rising effect of AVC
becomes more pronounced it becomes inevitable for ATC to rise.

⚫ The falling path of ATC is largely due to the falling AFC curve,
while its rising path is largely influenced by the rising AVC Curve.

⚫ The distance between ATC and AVC curve becomes narrow as the
curves move upward.

⚫ The slopes of the ATC curve, initially negative and there after
positive reflect the combined influence of fixed and variable cost
curve.
⚫ The economic reason underlying the U-shape of the average cost
curve is that there is greater important of fixed costs in any firm
till the normal capacity is exhausted and the normal point or the
point of least combination of various factors (fixed and variable)
is reached.

⚫ But once the normal output of the plant is reached, more and
more variables factors are to be employed due to the diminishing
returns so that the variable cost rises sharply to increase the
output further which outweighs the effect of falling average fixed
cost. So that the ATC starts moving with AVC .
RELATIONSHIP BETWEEN AC & MC
RELATIONSHIP BETWEEN MARGINAL
COST & AVERAGE COST
⚫Initially both AC & MC slopes downwards .

⚫After a certain level of output MC starts rising while


AC continues to fall.

⚫MC intersects AC only at its (AC’s) minimum point.

⚫Before intersection AC was greater than MC, but after


intersection MC is greater than AC.
LONG – Run Cost Output Relationship
⚫ The long run is defined as period of time during which the firm can vary
all its inputs.

⚫ The long run production function has no fixed factors and the firm has
no fixed costs in the long run.

⚫ To consider the size or scale of plant as a typical fixed input

⚫ The term plant refers to input size of the plant which is fixed and it
cannot be increased or decreased.

⚫ Long run is a period of time sufficiently long to permit changes in


plant{capital equipment ,machinery, land}.

⚫ The long run cost of production is the least possible cost of combination
of producing any given level of output when all inputs are variable,
including of course the size of the plant.
Long Run Average Cost
⚫ The long run average cost is the long run total cost divided by the level of
output .

⚫ The three short run average cost curve are also called plant curves.

⚫ The three short run average cost curves show three different scales of
production or three different sizes of plants.

⚫ For each of theses scales, there is an optimum output.

⚫ The producer would like to produce the optimum output, because his
average cost is the least cost at the point.

⚫ In the long run, the firm can choose among the three possible size of plant.

⚫ The firm will examine which size of the plant or short run average curve in
profitable to produce the given output at the minimum possible cost.
⚫ SAC1, SAC2, SAC3 are short run average cost curves depicting three different
plant sizes of scale of production.
⚫ The firm is producing under short term average cost curve SAC1.
⚫ the firm is producing OB output at lower cost.
⚫ If it produces OA output, the average cost (AL) is lower than OB output.
⚫ If it produces the same output in SAC2 curve, it costs AN. Since AL is smaller
than AN, the firm will produce with SAC1, curve.
⚫ Similarly, all other output levels up to OB can be produced with the small plant
size of SAC1 rather than SAC2.
⚫
⚫ The firm will be producing OB output in SAC1 size of plant. It will be seen
that if more output could be produced in SAC2, the average cost will be lower
than SAC1.
⚫ If the output OM is produced, the average cost will be OL1, which is taken to
be the lowest in the SAC2 plant size.
⚫ If the firm wants to increase output up to OC, it incurs CR cost which is higher
than the cost of SAC2 size.
⚫ If it produces OC output at SAC3 plant size , AC is CL2 , is lower than CR
on the SAC2 size . Therefore, for output larger than OC, the firm will employ a
plant size corresponding to the short run average cost curve SAC2.
⚫ if the tangents of all the short run cost curves are added, a long run average
cost is derived.
FEATURES OF LAC CURVE
⚫ LAC curve is called as an envelope curve because it envelopes all
the short run average cost curve
⚫ LAC curve is also called as tangent because it is drawn by joining
the loci of various plant curves relating to different operational
short run periods.

⚫ LAC curve is also called as planning curve of the firm. It indicates


the least unit cost of producing each possible level of output
⚫ LAC Curve is flatter U-shaped, initially it slopes downwards and
then after reaching a certain point, it gradually beings to slope
upwards
⚫ LAC curve represents minimum cost combinations for each level
of output in the long run.
LONG RUN MARGINAL COST CURVE (LMC)
⚫ The long run marginal cost curve (LMC) can be derived from the short run
marginal c0st curve i.e., from SMCs.
⚫ To derive LMC, the tangency points between SACs and LAC, the tangency points
between SACs and LAC should be considered, because in the long run production
planning these points determine the output levels at the different levels of
production .
⚫ Output is measured along the x axis and cost is measured along the y axis
when the firm products OM1 level of output, LMC is equal to M1D.
⚫ If output increase to OM2 LMC decreases to BM2.
⚫ It starts rising if the output is produced beyond OM2.
⚫ similarly CM3 measures LMC at output OM3.
⚫ The LMC curve is also a flatter U-shape like LAC.
⚫ It shows the trends in the marginal cost in response to the changes in the
scale of productions.
⚫ The shape of LMC curve is also a flatter U-shape indicating that initially as
output expands in the long run with the increasing scale of productions.
The relation between LMC & LAC is as follows :

⚫ When LAC decreases LMC also decreases

⚫ After a certain level and output LMC tends to rise, through LAC
continues to fall.

⚫ When LAC is minimum, LMC intersects LAC and hence LAC =


LMC.

⚫ After the intersection both slope upwards and LMC becomes


greater than LAC. Till intersection LMC is less than LAC.

You might also like