Economics Short Run Vs Long Run Costs Questions Medium
The average cost of production refers to the total cost of producing a certain quantity of goods or services divided by the quantity produced. It is a measure of the cost efficiency of production.
In the short run, a firm's average cost of production is influenced by both fixed costs and variable costs. Fixed costs are expenses that do not change with the level of production, such as rent or loan payments, while variable costs are expenses that vary with the level of production, such as raw materials or labor. As a result, in the short run, the average cost of production tends to decrease as production increases due to economies of scale. This means that as a firm produces more, it can spread its fixed costs over a larger quantity of output, leading to a lower average cost.
In the long run, all costs become variable, meaning that a firm can adjust its production capacity and change its fixed costs. In this case, the average cost of production is influenced by economies of scale, diseconomies of scale, and constant returns to scale. Initially, as a firm expands its production in the long run, it may experience economies of scale, which result in a decrease in average cost. This can be due to factors such as increased specialization, bulk purchasing discounts, or improved technology. However, beyond a certain point, the firm may encounter diseconomies of scale, where average costs start to increase as production continues to expand. This can be due to factors such as coordination difficulties, increased bureaucracy, or diminishing returns to scale. Finally, if a firm operates at the optimal scale, it may experience constant returns to scale, where average costs remain constant as production increases.
In summary, the average cost of production is influenced by both fixed and variable costs in the short run, leading to economies of scale. In the long run, the average cost is influenced by economies of scale, diseconomies of scale, and constant returns to scale, depending on the firm's level of production.