Cost curve summary

This section has highlighted some important properties of cost curves. Because we expect the behaviour of costs to be similar in most firms and for most production processes, we have a model of firms’ costs that we can apply widely.

In the long run the firm can:

• vary all inputs to minimise cost
• reduce average cost by:
  • adopting new technologies
  • increasing output to gain from economies of scale
  • over time, reducing average cost from learning by doing
• achieve no further cost saving advantages from increasing output once output is at MES.

In the short run:

• the firm is expected to have a u-shaped average cost curve
• the average cost curve shows how costs change at different levels of output
• average cost is the sum of the average fixed cost and average variable cost
• average fixed costs decrease as output increases
• average variable costs have a u-shaped curve because of the returns to inputs of variable factors vary with output
• at low levels of output, a firm is expected to experience increasing returns to variable factors, and at higher levels of output there will be diminishing returns.

The u shape of the short run average cost curve also implies something about the marginal cost curve, which we look at next.