Search results
Profits and Losses with the Average Cost Curve. Does maximizing profit (producing where MR = MC) imply an actual economic profit? The answer depends on firm’s profit margin (or average profit), which is the relationship between price and average total cost.
While in the short run firms are limited to operating on a single average cost curve (corresponding to the level of fixed costs they have chosen), in the long run when all costs are variable, they can choose to operate on any average cost curve.
- Diagram of Marginal Cost
- Average Cost Curves
- Long Run Cost Curves
Because the short run marginal cost curve is sloped like this, mathematically the average cost curve will be U shaped. Initially, average costs fall. But, when marginal cost is above the average cost, then average cost starts to rise. Marginal cost always passes through the lowest point of the average cost curve.
ATC (Average Total Cost) = Total Cost / quantityAVC (Average Variable Cost) = Variable cost / QuantityAFC (Average Fixed Cost) = Fixed cost / QuantityThe long-run cost curves are u shaped for different reasons. It is due to economies of scale and diseconomies of scale. If a firm has high fixed costs, increasing output will lead to lower average costs. However, after a certain output, a firm may experience diseconomies of scale. This occurs where increased output leads to higher average costs. Fo...
Interpret graphs of long-run average cost curves and short-run average cost curves. Analyze cost and production in the long run and short run. The long run is the period of time when all costs are variable. The long run depends on the specifics of the firm in question—it is not a precise period of time.
- Emma Hutchinson, Emma
- 2017
The answer depends on the relationship between price and average total cost. If the price that a firm charges is higher than its average cost of production for that quantity produced, then the firm will earn profits. Conversely, if the price that a firm charges is lower than its average cost of production, the firm will suffer losses.
When a firm looks at its total costs of production in the short run, a useful starting point is to divide total costs into two categories: fixed costs that cannot be changed in the short run and variable costs that can be changed. Fixed and Variable Costs.
People also ask
Can a firm operate on a single average cost curve?
What is the cost structure of a firm?
How does the average cost curve work?
Why are short run cost curves U shaped?
What is the relationship between price and average total cost?
How does a marginal cost curve change over time?
The long-run average cost (LRAC) curve shows the firm’s lowest cost per unit at each level of output, assuming that all factors of production are variable. The LRAC curve assumes that the firm has chosen the optimal factor mix, as described in the previous section, for producing any level of output.
