Relationship Between LR and SR Average and Marginal Curves

Relationship between LR and SR Average and Marginal Curves

1. Comparison of the SR and LR Average Costs at Output Q1 (or any other output level)

The LRAC curve shows the minimum average cost at which each quantity can be produced. According to the graph below, the lowest average cost at which Q1 units can be produced is c1.

There is a capital and labor combination (L1, K1) at which Q1 units can be produced at an average cost of c1.

Producing Q1 units with any other feasible input combination results in the same or higher average costs.

2. Properties of the SR Average Cost Curves

For each possible amount of capital, there are SR average total cost and marginal cost curves. The short run average cost curve for K1 units of capital shows the lowest cost of producing each output level given that the firm has K1 units of capital. The short run ATC and MC curves have their usual prosperities. Each of the short-run marginal cost curves goes through the minimum of the corresponding short-run average total cost curve.

3. Properties of LRAC and LRMC

The LRAC and LRMC curves satisfy the usual properties of marginal and average curves.

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Show the following curves in a manner that is consistent with the relationship between marginals and averages and the relationship between LRAC and SRATC curves

the SRATC curves for K1 units of capital, K2units of capital, and K3 units of capital;

the SRMC curves for K1 units of capital, K2units of capital, and K3 units of capital;

and the LRMC curve.

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The LRAC, LRMC, the three SRATC, and three SRMC curves must have the following properties:

1. The SRATC of producing Q1 units of output when the firm has K1 units of capital is the same as the LRAC of producing Q1 units of output. Also,the SRMC of producing Q1 units of output when the firm has K1 units of capital is the same as the LRAC of producing Q1 units of output

2. The SRATC of producing Q2 units of output when the firm has K2 units of capital is the same as the LRAC of producing Q2 units of output. Also, the SRMC of producing Q2 units of output when the firm has K2 units of capital is the same as the LRAC of producing Q2 units of output.

3. The SRATC of producing Q3 units of output when the firm has K3 units of capital is the same as the LRAC of producing Q3 units of output. Also, the SRMC of producing Q3 units of output when the firm has K3 units of capital is the same as the LRAC of producing Q3 units of output.

4. For no output level, is a SRATC less than the LRAC. Or in other words, a SRATC curve never goes below the LRAC.

5. The LRMC curve goes through the minimum of the LRAC curve. The LRMC curve is below the LRAC curve when the LRAC curve is declining and is above the LRAC curve when the LRAC is increasing.

6. Each of the SRMC curves goes through the minimum of the corresponding SRATC curve. Each of the SRMC curves is below the corresponding SRATC curve when the SRATC curve is declining and is above the corresponding SRATC curve when the SRATC curve is increasing.

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