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The total cost curve, if non-linear, can represent increasing and diminishing marginal returns.. The short-run total cost (SRTC) and long-run total cost (LRTC) curves are increasing in the quantity of output produced because producing more output requires more labor usage in both the short and long runs, and because in the long run producing more output involves using more of the physical ...
Long-run total cost (LRTC) is the cost function that represents the total cost of production for all goods produced. Long-run average cost (LRAC) is the cost function that represents the average cost per unit of producing some good. Long-run marginal cost (LRMC) is the cost function that represents the cost of producing one more unit of some good.
A long-run average cost curve is typically downward sloping at relatively low levels of output, and upward or downward sloping at relatively high levels of output. Most commonly, the long-run average cost curve is U-shaped, by definition reflecting economies of scale where negatively sloped and diseconomies of scale where positively sloped.
This long-run average cost diagram shows that as more is produced, so long as output does not exceed OQ 2, economies of scale are obtained. Beyond OQ 2, additional production will increase per-unit costs, reflecting diseconomies of scale. Consequently, the societally optimal firm size is OQ 2, where long-run average cost is at its lowest level.
In the long-run, firms change production levels in response to (expected) economic profits or losses, and the land, labour, capital goods and entrepreneurship vary to reach the minimum level of long-run average cost. A generic firm can make the following changes in the long-run: Enter an industry in response to (expected) profits
CVP is a short run, marginal analysis: it assumes that unit variable costs and unit revenues are constant, which is appropriate for small deviations from current production and sales, and assumes a neat division between fixed costs and variable costs, though in the long run all costs are variable.
Each of these factors reduces the long run average costs (LRAC) of production by shifting the short-run average total cost (SRATC) curve down and to the right. Economies of scale is a concept that may explain patterns in international trade or in the number of firms in a given market.
The marginal cost can also be calculated by finding the derivative of total cost or variable cost. Either of these derivatives work because the total cost includes variable cost and fixed cost, but fixed cost is a constant with a derivative of 0. The total cost of producing a specific level of output is the cost of all the factors of production.
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