Let’s Discuss cost curves in Micro Economics there are two types of cost curves U shaped cost curves in
Traditional Theory of Cost and L shaped cost curves in Modern Theory of cost we can discuss them one by one :
The traditional theory of cost, also known as the “cost-output relationship,” explains how a firm’s costs change as its level of output changes. It is divided into two key parts:
it can be seen via this link and I will describe them in written form as well
Short-Run Cost Analysis
Long-Run Cost Analysis
1. Short-Run Cost Analysis
In the short run, at least one factor of production (usually capital) is fixed, while other inputs (like labor) can be varied. The traditional theory breaks short-run costs into several categories:
Total Fixed Cost (TFC): Costs that do not change with the level of output (e.g., rent, salaries).
Total Variable Cost (TVC): Costs that vary directly with output (e.g., raw materials, labor).
Total Cost (TC): The sum of TFC and TVC:
TC = TFC + TVC
Average Fixed Cost (AFC): TFC divided by the quantity of output:
AFC =TFC/π
AFC decreases as output increases because fixed costs are spread over more units.
Average Variable Cost (AVC): TVC divided by the quantity of output:
AVC = TVC/π
Average Total Cost (ATC): The total cost per unit of output:
ATC = TC / π = AFC + AVC
Marginal Cost (MC): The change in total cost when an additional unit of output is produced:
MC = ΞTC / Ξ π
Marginal cost helps determine the level of output at which profit is maximized.
In the short run, costs exhibit a U-shaped behavior due to the law of diminishing returns. Initially, as production increases, marginal costs fall because of increasing returns to variable inputs. Eventually, marginal costs rise as inputs become less productive.
2. Long-Run Cost Analysis
In the long run, all factors of production can be varied, meaning there are no fixed costs. The firm can change its scale of operations. The traditional theory of long-run costs focuses on economies of scale and diseconomies of scale.
Economies of Scale: As the firm increases production, average costs decrease due to factors like specialization, bulk purchasing, and efficient use of resources.
Diseconomies of Scale: Beyond a certain point, increasing production leads to rising average costs due to factors like managerial inefficiencies or overuse of resources.
In the long run, the firm’s cost structure is represented by the long-run average cost curve (LRAC), which is typically U-shaped. This curve is derived from various short-run average cost curves at different scales of production.
Diagrammatic Representation
Short-Run Cost Curves: These include the AFC, AVC, ATC, and MC curves. The ATC and AVC curves are typically U-shaped, and the MC curve intersects both at their minimum points.
Long-Run Average Cost Curve (LRAC): The LRAC is also U-shaped, showing economies and diseconomies of scale. It is tangent to the lowest points of a series of short-run average cost curves.
In summary, the traditional theory of cost explains how production costs change with output, emphasizing the distinction between fixed and variable costs in the short run, and economies of scale in the long run.