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".

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.

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

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 🎯