Economics Short Run Vs Long Run Costs Questions
In the long run, average costs refer to the average cost per unit of output that a firm incurs when all inputs are variable. It takes into account both the fixed costs and the variable costs associated with producing a certain level of output. As a firm expands its production capacity and adjusts its inputs, the average costs in the long run tend to decrease due to economies of scale. This means that as the firm produces more units, the average cost per unit decreases, leading to increased efficiency and profitability. Conversely, if the firm reduces its production capacity, the average costs in the long run tend to increase due to diseconomies of scale. Overall, the concept of average costs in the long run helps firms make decisions regarding their production levels and capacity in order to optimize their cost efficiency.