The in various proportions to ultimately deal with

 

 

 

 

 

               

The reasons have been explained why the short-run and
the long run are different with the U shape pattern. Additionally it was
illustrated with diagrams and explanations.

(Guru, 2017)

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The examples of increasing returns to
scale may be overhead costs which may be the development a new software
programme or computer games. Secondly there is marginal costs of one extra copy
for sale is close to zero or just a few pennies. Thirdly if the firm
establishes its self within the market and they gain positive feedback from its
customers then this may result in the expansion of its customer base, as well
as the enhancement of its demand, which could encourage the firm to increase
its production. (Anon., 2017)
(Guru, 2017)

 

Nevertheless you can see that the
short run average costs is shown in variable proportions, whereas the long run
average costs is dependent on the return of scale. Furthermore in the long-run
the factors of the production can be used in various proportions to ultimately
deal with the increased output. The firm will also have a longer time frame
meaning it can build a larger scale to produce the anticipated output. (Anon., 2017) (Guru, 2017)

 

If a firm has high fixed costs then
it will lead to increasing output which will tend to lead to lower averaging
costs, as a result this is called economies of scale. However after a certain
point a firm may experience diseconomies. For example this may be when a firm
has a lack of organisation or communication with its staff. (Pettinger,
2011)

 

Long run average cost curves that are
‘U’ shaped differ to the short run average cost curves because in the long run
all costs are variable and the total scale of production can change. In
addition if the firm experiences economies of scale, then its long-run average
costs will decline as its scale of production increases. Furthermore the
diseconomies of a scale means that the firm’s long run average costs take a
rise. However if either weren’t to happen then the long run average costs will
stay horizontal. (Sloman, 2003, p. 134) (Guru, 2017)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

When the short run average cost curve
is ‘U’ shaped this means that there is diminishing returns. In the short run
capital is ultimately fixed. However after a certain point when firms start to
hire more and more workers it will start to lead in the productivity declining.
As a result when the firm employs more workers the marginal cost will increase,
which will lead to marginal cost curve being sloped as this will proceed to
making the average cost curve being ‘U’ shaped. However the average costs will
take a fall but when the marginal cost is above the average cost than the
average cost will start to rise. Therefore MC crosses through the AC at its
minimum point. Nevertheless if the MC is lower than AC as the AC will take a
fall. (Pettinger, 2011) (Sloman, 2003, p. 125)

 

If a frim starts off with one
employee the average costs are high but the levels of output is low because the
average fixed costs and the average variable costs are more. However when the
firm starts to hire more employees the level of output increases meaning the
average costs fall more with the average variable costs. In addition it will
continue to fall until it hits its minimum point which is the optimum level of
output. Once the optimum level is reached the average costs will start to rise
again as more employees are hired beyond the optimum level which will then
start to make the ‘U’ shaped pattern in the short run average cost curve. (Shaikh, 2017)

 

Furthermore there is also average
total cost which entails total cost per unit of output:AC=TC/Q=AFC+AVC. Average
fixed costs shows the total fixed cost per unit of output:AFC=TFC/Q. Average
variable cost is the total variable cost per unit of the total
output:AVC=TVC/Q. Marginal cost is the cost of producing one more unit of
output:MC=ChangeTC /Change/Q. (Sloman, 2003, p. 123)

 

A
long run average cost curve illustrates how the average cost varies with the
different outputs with the total assumption that all the factors are variable. However,
the short run illustrates the different elements such as replacement costs,
fixed costs, variable costs and total costs. Replacement costs is what the firm
would have to pay to ultimately replace the factors it currently owns. Fixed
costs is the total costs that do not vary with amount of output produced.
Variable costs is the opposite of fixed costs as the total costs do vary with
the amount of output produced. Total costs is the sum of the total fixed costs
and the total variable costs. (Sloman, 2003, p. 134) (Sloman, 2003, p. 122)

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