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SRAC LRAC Curves Presentation-1

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29 views5 pages

SRAC LRAC Curves Presentation-1

Uploaded by

Anupriya Khandaliya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Behavior of Short-Run and Long-

Run Average Cost Curves


An Overview of SRAC and LRAC
Curves
Short-Run Average Cost Curve (SRAC)
• 1. Definition:
• - SRAC represents the cost per unit of output when at least one input is fixed.

• 2. Shape and Behavior:


• - U-shaped
• Because with an increase in the level of output this curve Slopes downward
and after reaching it’s limit It rises with the output level.

• - Initially, costs decrease due to increasing returns to the variable input.


Because at the start, as you produce more, costs per unit go down because
adding more workers or materials makes the production process more efficient.

• - Eventually, costs increase as the fixed input becomes a constraint. the fixed
input (like a machine or space) becomes a restriction. For example, if you keep
adding workers in a small bakery with just one oven, they'll start waiting for the
oven to be free, getting in each other's way, and working less efficiently. This
overcrowding means each additional unit costs more to produce because the
fixed input can't handle the increased production smoothly. This leads to higher
costs per unit.
AC, AVC and AFC

Average Cost (AC): Also known as the Average Total Cost (ATC), it represents the
total cost per unit of output. It is calculated by dividing the Total Cost (TC) by the
quantity of output
AC= TC/Q

2. Average Variable Cost (AVC): This measures the variable cost per unit of
output. It is calculated by dividing the Total Variable Cost (TVC) by the quantity
of output (Q):
AVC= VC/Q

3. **Average Fixed Cost (AFC):** This measures the fixed cost per unit of
output. It is calculated by dividing the Total Fixed Cost (TFC) by the quantity of
output (Q):
AFC= FC/Q
Long-Run Average Cost Curve
(LRAC)
• 1. Definition:
• - LRAC represents the cost per unit of output when all inputs are variable.

• 2. Shape and Behavior:


• - U-shaped due to economies and diseconomies because, at first, producing more
lowers costs due to better efficiency (economies of scale), but eventually, costs rise
because managing large production becomes harder (diseconomies of scale).
• - Initially, costs decrease due to economies of scale. When a company starts
producing more of something, it can do things like buy materials in larger quantities
at a discount, use machines and workers more efficiently, and spread out fixed costs
like rent or salaries over more products. All these factors make each unit cheaper to
produce, so the overall cost per unit goes down. This is called economies of scale.

• - Eventually, costs increase due to diseconomies of scale. As production grows, the


process can become less efficient. For example, imagine trying to cook a huge meal
in a small kitchen. The kitchen gets crowded, cooking times increase, and mistakes
become more common. This inefficiency leads to higher costs per unit, which is what
happens due to diseconomies of scale.
Long-Run Marginal Cost Curve
(LRMC)
The LRMC curve represents the change in total cost when producing one additional
unit of output in the long run, where all inputs are variable. Key aspects include:

Relationship to LRAC: The LRMC curve intersects the LRAC curve at the LRAC’s
minimum point. This is because when LRAC is falling, LRMC is below LRAC, and
when LRAC is rising, LRMC is above LRAC.

Efficiency: The point where LRMC equals LRAC indicates the most efficient scale of
production. At this point, the cost of producing an additional unit equals the
average cost, and the firm is operating at its optimal efficiency.

Behavior: The LRMC curve typically starts below the LRAC curve when economies of
scale are present and rises above the LRAC curve as diseconomies of scale.

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