Question

Sketch the LR and SR ATC curves for a single firm. Explain the relationship between SR and LR ATC curves.

Answer 1

The chief difference between long- and short-run costs is there are no fixed factors in the long run. LR ATC is nothing but an envelope around the SR ATC curves, as we can see in the figures, to obtain the LR ATC curves we draw a curve that touches the minimum of all SR ATC curves. The long-run average cost (LRAC) curve shows the firm’s lowest cost per unit at each level of output, assuming that all factors of production are variable. The LRAC curve assumes that the firm has chosen the optimal factor mix, as described in the previous section, for producing any level of output. The costs it shows are therefore the lowest costs possible for each level of output. the RED curve is LR ATC and the BLUE ones are SR ATC.