Short Run And Long Run Cost Curves
Short Run And Long Run Cost Curves can be explained as follows. The change only takes place in the variable factors such as raw material, labour, 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:
In the diagram 13.7 given above, there are five alternative scales of plant SAC’, 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 SAC’ and oper2te 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 Rs. 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.
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