Welcome back to my blog! Today, we will discuss more about cost curve

This graph is exactly same with the graph I posted in my last blog. Last time, we discussed about the meaning at point A and B. Today, we will begin with the discussion of point C.

At point C on the left diagram, each worker adds fewer units to total output than the last (diminishing marginal returns have set in). But each worker is still paid the same wage, so each marginal unit that this new worker produces will on average cost more than the units produced by the last worker. Hence, the marginal cost curve must be rising (see point C on the right diagram).

After the introduction of the basic cost curve, I want to combine the four different cost curve together in on graph.

As you can see from this picture, The Average Fixed Cost curve is continually falling, at a slower rate towards the end because a fixed number is being divided by an ever-increasing number. The Average Cost and Average Variable Cost curves start fairly high, fall, and then rise again. It is because initially the totals are being divided by very small numbers, giving large averages.

The Marginal Cost curve cuts the Average Cost curve and Average Variable Cost curves at their minimum points.

Then is the long run and short run cost curve.

In the long run, all factors of production can vary, including capital. Over a period of time, most firms experience lots of ‘short runs’, which, together, make up the long run.

Assume the first short run average cost curve (SRAC1) represents the printer firm with four machines. Over the longer run, the firm may decide to invest in another machine, and move to SRAC2. The curve is lower than the last. This is because of economies of scale. As a result of being bigger, the firm finds that its cost per unit has fallen.

In a year or two, the firm might invest in a sixth machine, and move to SRAC3. There is a danger that the firm might get so big that diseconomies of scale occur.

Just a reminder, economic of scale refers to cost advantages, or falling average cost per unit, that an enterprise obtains as the scale of output is increased in the long run. It can be divided into two part: Internal economic of scale, which means the advantages gained by internal growth of firms to lower per-unit costs, and External economic of scale, which means the advantages gained from the growth and improvement of a firm’s industry or a region. All firms benefit from it.