Short Run Cost curve; Long Run Cost curves; Derivation of Long run A.C. curve
Table of Contents
Short Run Cost curve
Short run refers to a period of time, which is too brief for a firm to increase the quantities of all factors.
The size and capacity of the firm are fixed and it can increase production only by using more of a quantity of variable factors. The number of firm in the industry remain the same.
There are some factors like building or heavy machinery which can not be changed easily. The firm can increase or decrease their output by changing the variable factor only such as labor or working hour and materials. The costs of fixed and variable factors in the short run are called short-run costs of a firm.
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Long Run Cost curves
Long run cost curve of a firm are different from those in short run. However, both are closely related and long-run curves are derived from short-run cost curve.
There are two main reasons for the difference:
1). There is no F.C in the long run. All factors have become variable. The size and capacity of the firms can be changed according to demand.
2). In the Long run, all factors are completely divisible there optimums utilization is possible. It is because of the fact that they are flatter than Short run C. curves i.e. they fall slowly. Reach to their minimum point and they start rising slowly long-run cost curve are dish-shaped.
Derivation of Long run A.C. curve
The long-run C.C. can be derived from short-run A.C.C suppose a firm can prohance a certain to with difference assize of plants.
To start with the firm has a small plant e.g. pointing press can print a few 1000 poster daily. Later it expands the press as the need arises.
Another example, Marriage hall or restaurant etc. The short-run average cost curve of their plant is shown as short-run average cost (SAC1). If the firm feels that the demand for its products has to increase permanently and the capacity of plant No.1 is not enough to meet new demand. It installs a bigger or 2nd plants. For this it has to face short-run Average cost(SAC2). So long as the demand of the commodity is OB, or less it will use plant No.1 but if demand has permanently increased beyond OB it will have to shift to next bigger plant to reduce the Average cost.
The long-run average curve is also called in Envelop curve due to its peculiar shape.
The relation between Average cost and marginal costs is of special importance e.g. when A.C is falling M.C < AC when Ac is constant (neither falling nor increasing ) then AC=MC when AC is rising MC> AC. In the Long run, the firm will operate the scale of the plant which is most profitable to it.
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Naeem Javid Muhammad Hassani is working as Conservator of Forests in Balochistan Forest & Wildlife Department (BFWD). He is the CEO of Tech Urdu (techurdu.net) Forestrypedia (forestrypedia.com), All Pak Notifications (allpaknotifications.com), Essayspedia, etc & their YouTube Channels). He is an Environmentalist, Blogger, YouTuber, Developer & Vlogger.
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