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These cookies ensure basic functionalities and security features of the website, anonymously. Necessary cookies are absolutely essential for the website to function properly. The slope of the long-run average cost can be very different and we can experience economies and diseconomies of scale. Therefore, in the long-run, we don’t get diminishing returns. In the long run, all factors of production are variable (capital and labour). The reason for diminishing returns is that employing extra workers starts to lead to shortage of capital and Diagram of short-run average cost with Marginal Cost After this point, marginal cost starts to rise rapidly and so average costs start to rise as well. In the short run, capital is fixed initially, marginal cost falls until diminishing returns set in. Short-run average cost curves tend to be U shaped because of the law of diminishing returns. TC Total costs = FC+VC Short-run average costs VC = Variable costs – which do change with output
AC= TC/QĪverage variable cost (AVC) is the total variable cost (VC) divided by quantity AVC = VC/QįC = Fixed costs – not changing with output Average cost (AC) is the total cost (TC) divided by quantity.
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