Short-run versus Long-run costs
long vs short run cost graph
- a producer wil be on the long run cost graph when they have time to adjust their fixed costs level for the most desired of output - once the output is altered, the producer will move from the long run graph to the short run graph until the fixed costs adjust to the new output level - this will be shown on the graph when ever ATC touches the LRATC
Short-run versus Long-run costs
- all fixed costs become variable costs in the long run - when acquiring new input for production, it will have a higher fixed cost, but the extra input (if it makes the production more productive) will reduce variable costs for any given output level - this represents the trade off between lower fixed cost and higher variable cost or vice a versa - with low output, it will be better to not spend more on inputs for better production cuz there are too few outputs produced to spread the additional fixed costs - with high output, it is better to spend more money on inputs for better production cuz there is enough ouputs produced to spread the additional fixed costs - the firm should choose the level of fixed costs that minimize ATC
short-run average total cost curves
- for firms there are many choices for possible curves - However, a firm will eventually be on one of the possible curves that represrtns its fixed costs - a change in output= movment along curve
decreasing returns
- this happens often when a firm becomes too big to manage and comminucations/coordination fail
constant returns to scale
- this is when the long run cost curve is constant (or a horizontal line ) as output increases d
long run average total cost curve
- this represents the relationship between output and ATC when fixed cost have been chosen to minimize ATC for every level of output - if the change in output level is long standing, then the fixed costs at that level is not optimal - the firm will change its fixed costs that will minimize ATC for a new output level EX: if a firm produces 10 cars now but 10,000 cars in the future, they will want to buy machinery to keep up - -
reasons for increasing returns
a. specialization (as each workers specizlizes the firm becomes more efficient b. high fixed costs as initial setup ( as in car manufacturing , electricity generate ... each one requires a high fixed costs at the beginning) c. when a lot of people use the same good/service