The reasons have been explained why the short-run andthe long run are different with the U shape pattern. Additionally it wasillustrated with diagrams and explanations.(Guru, 2017) The examples of increasing returns toscale may be overhead costs which may be the development a new softwareprogramme or computer games. Secondly there is marginal costs of one extra copyfor sale is close to zero or just a few pennies.
Thirdly if the firmestablishes its self within the market and they gain positive feedback from itscustomers then this may result in the expansion of its customer base, as wellas the enhancement of its demand, which could encourage the firm to increaseits production. (Anon., 2017)(Guru, 2017) Nevertheless you can see that theshort run average costs is shown in variable proportions, whereas the long runaverage costs is dependent on the return of scale. Furthermore in the long-runthe factors of the production can be used in various proportions to ultimatelydeal with the increased output. The firm will also have a longer time framemeaning it can build a larger scale to produce the anticipated output. (Anon.
, 2017) (Guru, 2017) If a firm has high fixed costs thenit will lead to increasing output which will tend to lead to lower averagingcosts, as a result this is called economies of scale. However after a certainpoint a firm may experience diseconomies. For example this may be when a firmhas 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 runall costs are variable and the total scale of production can change.
Inaddition if the firm experiences economies of scale, then its long-run averagecosts will decline as its scale of production increases. Furthermore thediseconomies of a scale means that the firm’s long run average costs take arise. However if either weren’t to happen then the long run average costs willstay horizontal.
(Sloman, 2003, p. 134) (Guru, 2017) When the short run average cost curveis ‘U’ shaped this means that there is diminishing returns. In the short runcapital is ultimately fixed. However after a certain point when firms start tohire 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 tomaking the average cost curve being ‘U’ shaped.
However the average costs willtake a fall but when the marginal cost is above the average cost than theaverage cost will start to rise. Therefore MC crosses through the AC at itsminimum point. Nevertheless if the MC is lower than AC as the AC will take afall. (Pettinger, 2011) (Sloman, 2003, p. 125) If a frim starts off with oneemployee the average costs are high but the levels of output is low because theaverage fixed costs and the average variable costs are more.
However when thefirm starts to hire more employees the level of output increases meaning theaverage costs fall more with the average variable costs. In addition it willcontinue to fall until it hits its minimum point which is the optimum level ofoutput. Once the optimum level is reached the average costs will start to riseagain as more employees are hired beyond the optimum level which will thenstart to make the ‘U’ shaped pattern in the short run average cost curve. (Shaikh, 2017) Furthermore there is also averagetotal cost which entails total cost per unit of output:AC=TC/Q=AFC+AVC. Averagefixed costs shows the total fixed cost per unit of output:AFC=TFC/Q. Averagevariable cost is the total variable cost per unit of the totaloutput:AVC=TVC/Q. Marginal cost is the cost of producing one more unit ofoutput:MC=ChangeTC /Change/Q.
(Sloman, 2003, p. 123) Along run average cost curve illustrates how the average cost varies with thedifferent 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 firmwould have to pay to ultimately replace the factors it currently owns.
Fixedcosts 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 withthe amount of output produced. Total costs is the sum of the total fixed costsand the total variable costs. (Sloman, 2003, p. 134) (Sloman, 2003, p. 122)