Description
In the long run, no cost is fixed. This video explains how to analyse cost curves in the long run. We’ll see how they form derived from multiple short run cost curves.
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We can determine our production level and adjust plant sizes, investment in capital and labour accordingly. This gives us unlimited options. Depending on the scale we choose to implement, each level of production will be associated to new, short run cost curves. When we exhaust the infrastructure these provide us, we can upgrade to a new production level and so forth. The actual long run cost curve is made up of all of these individual scenarios, built up year after year.
Marginal costs only really make sense in the long run for each individual level of production. At optimal levels of production for each level, they intersect the long run average cost curve where this meets the short run average cost curve. This is what determines our optimal level of production.
The other important lesson to take away from this is the fact that, when we reach the optimal point where efficiency is at its best, average and marginal costs are the same, as happened in the short run.
Learn more by reading the dictionary entry.
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