hello and welcome back to the uh our discussions on cost curves uh we are going to in this
module we are going to wind up our discussion on cost curves uh we talked about the different
the cost in different of its forms like the average cost curve the marginal cost curve
etc and we looked at their shapes and all so now we are going to see if the cost curves
change during the short run and the long run .
so difference between long run and short run now how are we going to be keep on using this
long run and short run all the time and we are going to use it a lot in the future also
so let me explain what is the difference between long run and short run now short run is something
some inputs require some time to increase or decrease in an amount the amount of time
for which they are fixed is known as the short run
for example plant size land large machineries so basically when we talked about costs and
when we said that there is a fixed cost there is variable cost now when we say fixed cost
now this cost is not fixed forever but what we mean by fixed cost is basically that this
these uh variables these inputs uh these inputs require some time to change like we need some
like the producer when the producer is using these inputs uh like land machinery etc huge
machinery land uh or a certain factory size it is using its already created a capacity
of capacity and there is a certain factory size that it is that he is operating in
now these are all fixed uh inputs in the sense that they cannot be changed very easily or
quickly so they are called fixed variables and short run is basically the time period
for which these all these uh inputs are fixed and the variable the variable cost that we
discussed is basically the inputs which vary with the amount of output
so if we if if you if the producer wants to increase the output he needs to increase uh
the these uh variable inputs and this is called the variable cost that he incurs and this
is flexible and this changes uh this can be changed in the short run also
so in the short run some inputs require some time to increase or decrease in amount and
the amount of time for which they are fixed is known as the short run for example plant
size land large machineries etc and long run is the amount of time required to increase
or decrease the amount of all inputs and this is called the is called the long run in the
long run all inputs are flexible so basically the uh fixed uh inputs like plant
size land machineries etc they can be varied in the long run also so a firm might like
to increase its capacity increase the plant size increase the number of factories it has
or increase the by a few more plots of land or large machineries but it requires some
time to do that and that is the long run for a firm and the opposite can also happen
a firm might decide to reduce its fixed cost and it may actually dispose of the land uh
dispose of certain factories some of its factories or machineries for doing that also it may
require a little more time and that is called the long run
so example of long run it is possible to set up more factories or buy or sell land machineries
etc in the long run so in the long run to produce any level of output a firm will choose
that mix of inputs for which its average total cost is minimum that is the firm will choose
the most efficient mix of inputs for any level of output so let me explain this with the
help of a figure . say for example we had ended our discussion
the previous module with saying that the average total cost curve is u shaped the average total
cost curve is u shaped and that is because in the so when output is gradually increasing
from a very low level average fixed cost is falling so that pulls down the average total
cost and as output is increasing average variable cost goes up and that pulls up the average
total cost so the average total cost looks something like this its again a u shaped curve
and um this is this is the long run average cost curve .
now uh so this is just for recap and let me draw
now say uh so this is the output and this is cost curve now say uh in the in the short
run a firm is stuck with a certain factory size a certain amount of land a certain machinery
etc so in the short run it can choose various levels of uh factory size say for example
uh when a firm decides that it is going to start production it can make a choice of how
much fixed (variab) fixed inputs to install or how much fixed input it it will start production
with so say it has 3 choices and this is one factory
size this is another factory size and this is another factory size so say he has 3 choices
there is a these are short run average cost curves say it the size small size factory
size this is short run average cost with a medium factory size this is short run average
cost with a large factory size so these are the options that the firm has these are the
options that the firm has so in the short run the firm can start producing at either
this level of factory size or the medium or the large but once it has chosen its uh fixed
inputs that is once it has chosen its fixed uh chosen its factory size it is stuck with
that in the short run so say for example now the firm starts with
the small factory it starts with a small factory and then let me show 2 levels of output q
a and q b say a firm is has started its production with srac s this is the factory size or small
factory size that the uh firm is operating with and its producing a output which is less
than q a so its fine it is producing it here now say for example the firm knows that given
the demand situation in the market or whatever like the firm to maximize its profit it would
like to increase the output so given say there is huge demand for this product in the market
and the firm would like to increase its production so now if the firm wants to increase its production
beyond q a it can do so with the existing factory size or it can decide to move on to
a medium size plant in the long run so in the short run if it has to increase
its output beyond q a it will operate on this small factory size and it incurs a cost say
for example it produces q a prime so to produce q a prime since in the short run it is stuck
with this cost curve it will incur a cost which is here so this is c s this is the cost
it will incur but in the long run if the firm realizes that its intention of producing output
is beyond q a in the long run it can decide to move on to the medium factory size and
in that case its cost will reduce to c m cost will reduce to c m
similarly but if the the output the the production requirement is less than q a it would not
make sense for the firm to move on to a bigger factory size similar thing holds true for
q b if it moves on to a level in the medium when it is operating on the medium factory
size and its uh production requirement goes beyond q b then again it would make sense
for it to change its factory size to the large one in the long run because in the short run
in any case it is stuck with this factory size
so in the long run it would make sense for it to change its factory size to the larger
one and produce at a lower cost than the previous one so depending on how much output it plans
to produce in the long run the firm can change all its inputs so when the firm does that
it is basically producing at the minimum possible cost in the long run
so in the long run since all the inputs are flexible the firm is going to choose that
combination of uh all the inputs not only the variable cost inputs but the fixed cost
inputs also because they are no longer fixed cost in the long run the firm is going to
choose the that combination of input which makes its cost minimum in the long run so
in the long run its the firm is going to choose that combination of inputs .
so now here i have drawn 3 uh factory sizes but in the real world in reality its possible
to have its possible to have numerous factory sizes so for every unit of so for every unit
of output its possible to have various factory sizes and basically the firm will be choosing
in the long run the firm will be adjusting its it all its inputs and will be choosing
the minimum of these cost curves which makes the firms cost the minimum
so basically the long run average cost is an envelope of all these short run cost curves
so the long run average total cost curve is an envelope of all these short run cost curves
and in the long run to produce any level of output a firm will choose that mix of inputs
for which its average total cost is minimum that is a firm will choose the most efficient
mix of inputs for any level of output . so now
now that brings us to another discussion about economies of scale now the long run average
total cost curve is u shaped because of economies of scale .
so as we have seen the long run average cost total cost curve that is again
is u shaped because of economies of scale now at low levels of output with increase
in output average cost falls because of economies of scale so what we are saying here is a the
so at low levels of output at low levels of output as the firm keeps on increasing the
output the with rise in production there is economy of scale which means basically the
average cost falls the reason for this is as the firm keeps on
increasing its production there is a lot of efficiency improvement it its its something
called learning by doing where the firm basically gathers knowledge about producing more and
producing better and producing more efficiently and there is a lot of uh cost advantages as
the firm increases its output level then uh it it reaches a level where there
is it it that the the advantage actually goes on till a certain level where they after which
there is no more increase in or decrease in cost because of increase in output and beyond
that there is diseconomy of scale where basically when output increases lot of inefficiencies
creep in say for example if there is a huge organization which which is uh bursting to
its brims and uh producing a huge level of output lot of managerial inefficiencies lot
of miscommunications uh these kinds of problems can creep in which can actually reduce the
uh which can actually increase the uh cost per unit of output
so at low levels of output with increase in output average cost falls because of economies
of scale for example there is more learning by doing increased specialization and efficiency
improvement as production increases constant returns to scale happens when average cost
stays the same even as output increases at very high level of production with increase
in output average cost may actually rise because of diseconomies of scale for example coordination
problems increase in complexities and managerial inefficiencies in larger size firms with high
levels of output so that uh that completes our discussion on
cost and uh we will be moving on to discussing about market structure but one thing that
we need to remember is the all the uh cost structures the cost curve the cost the relationships
the long run the short run the definition our understanding of cost everything stays
the same no matter which market structure we are discussing
so in the following weeks when we take up different market structures of whether perfect
competition or monopoly oligopoly or monopolistic competition we are going to see that the cost
structures the cost curves as we have seen them in this week they all remain the same
in all the market structures what will basically change is the demand situation in each of
these markets and what will change is how the uh price is determined in different markets
and we move on to profit maximization objective of the firms and determine in each market
structure how the firms decide how much to charge and how much to produce thank you