Question

derive the long run average cost curve using short run average cost curves diagrammatically. ​

Answer 1

Explanation:

Cost in Short Run and Long Run

In this article we will discuss about Cost in Short Run and Long Run.

Cost in Short Run:

It may be noted at the outset that, in cost ac­counting, we adopt functional classification of cost. But in economics we adopt a different type of clas­sification, viz., behavioural classification-cost beha­viour is related to output changes.

In the short run the levels of usage of some input are fixed and costs associated with these fixed inputs must be incurred regardless of the level of output produced. Other costs do vary with the level of output produced by the firm during that time period.

The sum-total of all such costs-fixed and variable, explicit and implicit- is short-run total cost. It is also possible to speak of semi-fixed or semi-variable cost such as wages and compensation of foremen and electricity bill. For the sake of simplicity we assume that all short run costs to fall into one of two categories, fixed or variable.

Short-Run Total Cost:

A typical short-run total cost curve (STC) is shown in Fig. 14.3. This curve indicates the firm’s total cost of production for each level of output when the usage of one or more of the firm’s resources remains fixed.

When output is zero, cost is positive because fixed cost has to be incurred regardless of output. Examples of such costs are rent of land, deprecia­tion charges, license fee, interest on loan, etc. They are called unavoidable contractual costs. Such costs remain contractually fixed and so cannot be avoided in the short run.

The only way to avoid such costs is

by going into liquidation. The total fixed cost (TFC) curve is a horizontal straight line. Total variable is the difference between total cost and fixed cost. The total variable cost curve (TVC) starts from the origin, because such cost varies with the level of output and hence are avoidable. Examples are electricity tariff, wages and compensation of casual workers, cost of raw materials etc.

In Fig. 14.3 the total cost (OC) of producing Q units of output is total fixed cost OF plus total vari­able cost (FC).

Short-run Costs

Clearly, variable cost and, therefore, total cost must increase with an increase in output. We also see that variable cost first increase at a decreasing rate (the slope of STC decreases) then increase at an increasing rate (the slope of STC increases). This cost structure is accounted for by the law of Variable Proportions.

Answer 2

Some inputs are fixed in the short run, while others are changing. In the long run, however, the firm can change all of its inputs. When all individual elements are variable, the long-run cost is the lowest cost of producing any given amount of production. The long-run cost curve explains the functional relationship between outgoing and long-term production costs.

short run average cost curves (SACs) as shown in Fig

Given the size of the plant, a company can operate on any SAC in the short term. Let's pretend there are just three plants that are technically conceivable for the purpose of clarity. As a result, the firm changes the amount of variable inputs to raise or decrease its outputs.

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