Short-run vs Long-run Cost Curves – U-Shape & Envelope Curve
In the short run, some factors are fixed. In the long run, all factors are variable. This difference gives different cost curves.
1. Short-run Cost Curves
Short-run curves include:
- AFC – Average Fixed Cost
- AVC – Average Variable Cost
- AC – Average Cost
- MC – Marginal Cost
Shape
- AFC – downward sloping.
- AVC – U-shaped.
- AC – U-shaped.
- MC – U-shaped, cuts AVC & AC at their minimum points.
2. Long-run Average Cost (LAC) Curve
Long-run Average Cost (LAC) shows the minimum average cost of producing each output level when the firm can vary all inputs, choosing the best plant size for each output.
- Also called "planning curve" or "envelope curve".
Key Concept – LAC
LAC = lower boundary of a family of short-run AC curves, each representing a different plant size.
3. Envelope Curve Explanation
- For each output level, firm can choose from several short-run AC (SAC) curves (small, medium, large plant).
- LAC curve is drawn as a smooth curve tangent to all SAC curves from below.
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4. Shape of LAC Curve
- Generally U-shaped or L-shaped.
- Due to economies and diseconomies of scale:
- At low output → economies dominate → LAC falls.
- At high output → diseconomies dominate → LAC rises.
5. Short-run vs Long-run Cost Curves – Comparison
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6. Quick Revision Points
- Short run: fixed and variable factors; several SAC curves.
- Long run: all factors variable; LAC is envelope of SACs.
- LAC shape explained by economies/diseconomies of scale.
7. Quiz Time 🎯
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