Th3.3: The Relationship Between Short-run and Long-run Cost Curves

Question 1

Why are short run average cost (SRAC) curves U-shaped?

Answer 1

because of the law of diminishing returns

Question 2

Why are long run average cost (LRAC) curves U-shaped?

Answer 2

because of economies and diseconomies of scale

Question 3

Refer to PP

Look at Graph 31. What is the LRAC an ‘envelope’ for?

Answer 3

all associated SRAC curves because the LRAC is either equal to or set below the relevant SRAC, as shown in the diagram

Question 4

Refer to PP
Look at Graph 31. Firms may become more popular and need to produce more than this amount in the short run - what will this do?

Answer 4

cause a rise in SRAC due to the law of diminishing returns as some factors of production are fixed

Question 5

Refer to PP

Look at Graph 31. In what circumstance may the SRAC be shifted and why?

Answer 5

in the long run as all factors become variables

Question 6

Refer to PP

Look at Graph 31. Why will the new SRAC curve be lower?

Answer 6

since the firm is able to enjoy economies of scale

Question 7

This will continue to occur until…

Answer 7

the firm begins to experience constant returns to scale and eventually diseconomies of scale

Question 8

Refer to PP

Look at Graph 31. Up until output Q1…

Answer 8

the firm experiences economies of scale and so sees falling LRAC

Question 9

Refer to PP

Look at Graph 31. From output Q1 to output Q2…

Answer 9

the firm has constant returns to scale where their LRAC are constant

Question 10

Refer to PP

Look at Graph 31. Any output above Q2 means…

Answer 10

the firm experiences diseconomies of scale and their LRAC rises