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Part 3-1 The Derivation of LRMC

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94 views3 pages

Part 3-1 The Derivation of LRMC

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phamtouyen24012005
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The Derivation of Long-Run Marginal Cost Curve

By Supriya Guru Cost Curves

The Derivation of Long-Run Marginal Cost Curve!

Since marginal cost curve is important both from the viewpoint of the short run and
the long run, it will be useful to know how the long-run marginal cost curve is
derived.

The long-run marginal cost curve can be directly derived from the long-run total cost
curve, since the long-run marginal cost at a level of output is given by the slope of the
total cost curve at the point corresponding to that level of output.

Besides, the long-ran marginal cost curve can be derived from the long-run average
cost curve, because the long-ran marginal cost curve is related to the long-run average
cost curve in the same way as the short-ran marginal cost curve is related to short-run
average cost curve. In Fig. 19.12, it is depicted that how the long-run marginal cost
curve LMC is derived from a long-run average cost curve LAC enveloping a family of
short-run average and marginal cost curves.

If the output OA is too produced in the long ran, then it must be produced on the long-
run average cost curve LAC at point H which is a tangency point with the short-run
average cost curve SAC1. Thus, when output OA is to be produced in the long run, it
will be produced with the plant corresponding to the short-run average cost curve
SAC1 and the short-run marginal cost curve SMC1.

Corresponding to the tangency point H between the short-run average cost curve SAC1
and the long-run average cost curve LAC, there is a point N on the short run marginal
cost curve SMC. This means that the production of output OA in the long run involves
the marginal cost AN. Therefore point N must lie on the long-run marginal cost curve
corresponding to output OA. If output OB is to be produced in the long run, it will be
produced at point Q which is the tangency point between LAC and SAC2.

Q is also the point on the short-run marginal cost curve SMC 2, corresponding to
output OB. (Q is the common point between SAC2 and SMC2 because Q is the
minimum point of SAC2, at which the SMC2, cuts it from below). Thus Q must also lie
on the long-run marginal cost curve corresponding to output OB. Similarly, if output
OC is to be produced in the long run, it will be produced at point M which is the
tangency point between LAC and SAC3 Corresponding to point M, the relevant point
on the SMC3 is K which means that the long-run marginal cost of producing OC is
CK.

Thus point K must lie on the long-run marginal cost curve corresponding to output
OC. By connecting points N, Q and K we obtain the long-run marginal cost curve
LMC. It will be seen from Fig. 19.12 that the long-run marginal cost curves is flatter
than the short-run marginal cost curves.

It should also be remembered that the relationship between the long-run marginal cost
curve LMC and the long-run average cost curve LAC is the same as that between the
short-run marginal cost curve and the short -run average cost curve.

Thus, when the long-run marginal cost curve LMC lies below the long-run average
cost curve, the latter will be falling, and when the long-run marginal cost curve lies
above the long-run average cost, the latter will be rising. When the long- run marginal
cost is equal to the long- run average cost, the latter will be neither rising nor falling.

Relationship of LAC and LMC with SAC and SMC:

It is important to note that LAC and SAC curves are related in an important way with
SMC and LMC curves. This relationship shows, as will be seen from Fig. 19.13, that
at the level of output at which a particular SAC curve is tangent to the LAC curve, the
corresponding SMC curve intersects the LMC curve.

This relationship can be proved using a short-run total cost curve and the long run
total cost curve and this has been done in Figure 19.13 where a short-run total cost
curve STC and the long-run total cost curve LTC are drawn.

It will be seen from Figure 19.13 that long-run total cost curve LTC lies below the
short-run total cost curve STC at all levels of output except at output OA at which the
two curves are tangent. This means that L4C is less than SAC at all levels of output
other than OA.

As will be seen from the bottom of panel figure 19.13 that long-run average cost LAC
will be equal to the short-run average cost SAC at output OA at which LTC curve is
tangent to the STC curve. But the long-run marginal cost LMC must also be equal to
short-run marginal cost SMC at output OA i.e. the tangency point P.
This is because marginal cost is given by the slope of the total cost curve at any point,
and the LTC curve and STC curve have the same slope at the tangency point P. It will
be seen from the bottom panel of Fig. 19.13 that at output level OA, where the SAC is
equal to the LAC, SMC is also equal to the LMC.

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