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It is generally believed by economists that the long-run average cost curve is normally U shaped, that is, the long-run average cost curve first declines as output is increased and then beyond a certain point it rises.
The following article will guide you to know why cost curve is “U” shaped. The addition of fixed and Variable Cost gives us total costs, which when divided by the output give us Average Costs in the short period.
- 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...
Jul 17, 2023 · Calculate long run total cost; Identify economies of scale, diseconomies of scale, and constant returns to scale; 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
Shapes of Long-Run Average Cost Curves. 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.
Thus, the long-run average cost (LRAC) curve is actually based on a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. More precisely, the long-run average cost curve will be the least expensive average cost curve for any level of output.
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Mar 20, 2019 · Cost curves are graphs of how a firm’s costs change with change in output. Economists draw separate curves for short-run and long-run because firms have higher flexibility in selecting their inputs in the long-run.
