Question

What are long run and short run in producer theory? Using a diagram, explain clearly the reason that the short run cost is generally higher than the long run cost to produce each level of output. When is the short run and long run costs the same?

Answer 1

Long run in producer theory is a cost function which doesnot have any fix cost whereas in short run there is atleast one fix factor of production and cost of that one fix factor of production are fixed cost in short run.

In long run, average cost can be maximum of short run average cost or it is lower than short run average cost.

short run and long run average cost is at min of AC. I.e. at the level at which the short run fix factor of production is optimal.