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Short-Run, Long-Run Cost

short-run cost - remember that certain inputs are fixed in the short-run

 

  • marginal (incremental) cost - increase in cost from producing another unit of output
    • no need to consider fixed cost (just a function added on)
    • MC = D(VC)/DQ = DC/DQ
  • average total cost (ATC) - divided into average fixed and variable cost
    • average fixed cost = FC/Q, decreases as output increases
    • average variable cost = VC/Q
    • difference between average total cost and average variable cost decreases as output increases (since their difference is equal to the average fixed cost)
  • MC = w/MPL
    • eventually increases as output increases
  • marginal cost curve crosses average variable cost and average total cost at their minimum points

long-run cost - firm now allowed to change all its inputs  

  • costs/prices sometimes amortized (allocated) across the life of the use of the equipment (ie. plane bought for $200 million but since it's used for 40 years, it's at a cost of $5 million per year)
    • also means that the economic value of the plane decreases by $5 million every year (has 0 value after 40 years)
    • also note that w/o buying the plane, the firm would've had $150 million that could've gained money through interest (opportunity cost)
  • user cost of capital = economic depreciation + (interest)(value of capital)
    • value of capital decreases w/ time
  • long-run marginal cost curve intersects long-run average cost at its minimum, just like w/ short-run equivalents
Subject: 
Economics
Subject X2: 
Economics

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