Economics Short Run Vs Long Run Costs Questions Medium
The shape of a firm's short-run and long-run cost curves is determined by several factors.
In the short run, the main factor that determines the shape of a firm's cost curve is the law of diminishing returns. As a firm increases its output in the short run by adding more units of a variable input (such as labor), the marginal product of that input will eventually start to decline. This leads to increasing marginal costs, which causes the short-run cost curve to slope upward. Additionally, fixed costs, such as rent or loan payments, do not change in the short run, so they are spread over a smaller quantity of output, further contributing to the upward slope of the short-run cost curve.
In the long run, all inputs are variable, meaning that a firm can adjust its production levels and change the quantities of all inputs it uses. The shape of the long-run cost curve is determined by economies and diseconomies of scale. Economies of scale occur when a firm's average costs decrease as it increases its scale of production. This can be due to factors such as increased specialization, better utilization of resources, or bulk purchasing discounts. As a result, the long-run cost curve typically slopes downward. On the other hand, diseconomies of scale occur when a firm's average costs increase as it expands its production. This can be due to factors such as coordination problems, communication issues, or diminishing returns to management. As a result, the long-run cost curve may eventually slope upward.
Overall, the shape of a firm's short-run and long-run cost curves is influenced by the law of diminishing returns in the short run and economies and diseconomies of scale in the long run.