Economics Short Run Vs Long Run Costs Questions
In the short run, average cost refers to the average cost per unit of output produced by a firm. It is calculated by dividing the total cost of production by the quantity of output. Average cost includes both fixed costs (costs that do not change with the level of output) and variable costs (costs that vary with the level of output). As the firm increases its production in the short run, average cost initially decreases due to economies of scale, but eventually starts to increase due to diminishing returns.