The long run is a period of time when firms have sufficient time to change size of the plant and scale of operation.Since there are no fixed factors and fixed in the long run,there no fixed cost curves.All the factors are variable in the long run.Hence,we need to examine only long run average and marginal cost curves.The calculation of both these costs same as in the short run.It should be noted that the concept of long run cost is only hypothetical.Because,there can be no change in plant every now and them.
Derivation of long run average cost curve:In the short run,firm is tied to given plan.So there is only one average cost curve.But in the long run,the firm can change plant size.The large plant is used to produce more and the small plant is used to produce less.Hence,in the long run there may be many average cost curves.The firms produces at lowest average cost in long run than in the short run.
The long run average cost curve is derived from short run average cost curves as shown in the diagram.Suppose,there are three plants available-small,medium and large represented by SAC1,SAC2 and SAC3.
If a firm begins form small plant SAC1 and the demand for the product increase.It can produce output up to ox1 at lower cost.After this the cost increase.If demand reaches ox2,the firm can either continue production small plant or install medium plant represented by SAC2.If demand exceeds ox2,the firm installs medium plant.Because,the output more than ox2 can be produced at lower cost by medium plant than by small plant.
Similarly,the demand exceeds ox3;the firms installs large plant.Because,the output greater than ox3 can be produced at lower cost by large plant.the thick portion of each SAC curve thus shows the lowest long run average cost curve of producing particular level of output.Hence,the scallop shaped thick part of the short run average cost curves is long run average cost curve of the firm.
Derivation of long run average cost curve:In the short run,firm is tied to given plan.So there is only one average cost curve.But in the long run,the firm can change plant size.The large plant is used to produce more and the small plant is used to produce less.Hence,in the long run there may be many average cost curves.The firms produces at lowest average cost in long run than in the short run.
The long run average cost curve is derived from short run average cost curves as shown in the diagram.Suppose,there are three plants available-small,medium and large represented by SAC1,SAC2 and SAC3.
If a firm begins form small plant SAC1 and the demand for the product increase.It can produce output up to ox1 at lower cost.After this the cost increase.If demand reaches ox2,the firm can either continue production small plant or install medium plant represented by SAC2.If demand exceeds ox2,the firm installs medium plant.Because,the output more than ox2 can be produced at lower cost by medium plant than by small plant.
Similarly,the demand exceeds ox3;the firms installs large plant.Because,the output greater than ox3 can be produced at lower cost by large plant.the thick portion of each SAC curve thus shows the lowest long run average cost curve of producing particular level of output.Hence,the scallop shaped thick part of the short run average cost curves is long run average cost curve of the firm.
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