SHORT RUN AND LONG RUN COST CURVES
Short-run cost curves are normally based on a production function with one variable factor of production that displays first increasing and then decreasing marginal productivity. Increasing marginal productivity is associated with the negatively sloped portion of the marginal cost curve, while decreasing marginal productivity is associated with the positively sloped portion. The average fixed cost (AFC) curve is the cost of the fixed factor of production divided by the quantity of units of the output,
While the average variable cost (AVC) curve cost traces out the per unit cost of variable factor of production. The U-shaped average total cost (ATC) curve is derived by adding the average fixed and variable costs. The marginal cost (MC) intersects both the AVC and ATC curves at their minimum points. Declining average total costs are explained as the result of spreading the fixed costs over greater quantities and, at low quantities, the result of the increasing marginal productivity, in addition. Increasing average costs occur when the effect of declining marginal productivity overwhelms the effect of spreading the fixed costs.
The long-run cost curves, usually presented in a separate diagram, are also expressed most commonly in their average, or per unit, form, represented here in Figure 2. The long-run average cost (LRAC) curve is shown to be an envelope of the short-run average cost (SRAC) curves, lying everywhere below or tangent to the short-run curves. The firm is constrained in the shortrun in selecting the optimal mix of factors of production and so will never be able to find a cheaper mix than can be found in the long-run when there are no constraints.