Long Run and Short Run Costs

Long-Run and Short-Run Costs
Name
Institution
Author Note

Long-Run and Short-Run Costs
According to Beggs (2011), the two types of costs differ in the fact that the Short-Run consists of both variable and fixed costs, while only variable costs are present during the Long-Run. Also, the long run costs adopt a U-shaped Average Total Cost curve (ATC) which falls in the beginning up to a minimum and then goes up. As production increases, the ATC curve starts to fall and arrives at its minimum when the firm utilizes its scale of production entirely. On the other hand, if an enterprise increases its level of production in the Short-Run, with a fixed scale of plant, Economies of scale of the product produced changes into diseconomies making the ATC rise (Froeb, McCann, Ward & Shor, 2015). In the Long Run, variable proportions of factors of production may be used to cater for increased output. The Long-Run curve also adopts a U-shape. However, it is flatter than the Short Run ATC curve as presented in Diagram 1.
Diagram 1

The above diagram contains five alternative plant scales— SRAC1, SRAC2, SRAC3, SRAC4, SRAC4 and SRAC5, and the firm will operate in the most profitable scale in the Long-Run. For instance, if the expected output is 100 units per time unit, the enterprise will build plant scale SRAC1 and conduct its operations at point A. Also, if the expected output is 600 units per time unit, then the enterprise will develop the plant scale denoted as SRAC5 and conduct its operations at the point marked E.

The Long-Run, average cost (LRAC) curve is found by drawing a tangent to each, Short-Run cost curve. In Figure 1, the LRAC is lowest at point C which gives the minimum cost and the optimal output. Therefore, mathematically, the LRAC is an envelope of the SRAC curves.

References
Beggs, J. (December 27, 2011). The Short Run versus the Long Run. YouTube. Retrieved on November 2, 2018, from https://www.youtube.com/watch?v=z6_ZOcxRU6M&feature=youtu.be.
Froeb, L. M., McCann, B. T., Ward, M. R., & Shor, M. (2015). Managerial Economics. Cengage Learning.