Economics Short Run Vs Long Run Costs Questions Medium
Average revenue of distribution refers to the average amount of revenue generated per unit of output sold by a firm. It is calculated by dividing the total revenue earned by the quantity of output sold.
In the short run, a firm's average revenue of distribution is closely related to its short-run costs. Short-run costs include both fixed costs and variable costs. Fixed costs are expenses that do not change with the level of output, such as rent or loan payments, while variable costs vary with the level of output, such as raw material costs or labor expenses.
The relationship between average revenue of distribution and short-run costs can be understood through the concept of marginal cost. Marginal cost refers to the additional cost incurred by producing one more unit of output. In the short run, if the average revenue of distribution is greater than the marginal cost, the firm is generating profit. Conversely, if the average revenue of distribution is less than the marginal cost, the firm is incurring losses. Therefore, the average revenue of distribution in the short run is influenced by the level of short-run costs and determines the profitability of the firm.
In the long run, the relationship between average revenue of distribution and costs is more complex. In the long run, all costs are considered variable costs as firms have the flexibility to adjust their inputs and production processes. This means that firms can change their scale of production, expand or reduce their capacity, and enter or exit the market. In the long run, firms aim to minimize their average costs, which include both average fixed costs and average variable costs.
The average revenue of distribution in the long run is influenced by the firm's ability to optimize its production processes and achieve economies of scale. Economies of scale refer to the cost advantages that firms can achieve by increasing their scale of production. As firms expand their production and increase their output, they can spread their fixed costs over a larger quantity of output, leading to lower average costs and higher average revenue of distribution.
In summary, the average revenue of distribution is closely related to both short-run and long-run costs. In the short run, it determines the profitability of the firm by comparing it with the marginal cost. In the long run, it is influenced by the firm's ability to optimize its production processes and achieve economies of scale, leading to lower average costs and higher average revenue of distribution.