Cost curves graphically represent the costs of production as a function of quantity produced. There are various types of cost curves that apply to both the short-run and long-run, including total, average, and marginal cost curves. In the short-run, one factor of production is fixed, whereas in the long-run all factors are variable. Short-run total cost curves can be tangent to but not cross the long-run total cost curve, representing their relationship at the optimal production level that minimizes costs.

1. Cost curve
 In economics,a cost curve is a graph of the costs of production as a
function of total quantity produced.In a free market
economy,productively efficientfirms optimize their production
process byminimizing costconsistent with each possiblelevel of
production, and the result is a cost curve.
 Profit-maximizing firms use cost curves to decide output quantities.
There are various types of cost curves, all related to each other,
including total and average cost curves; marginal ("for each additional
unit") cost curves, which are equal to the differential of the total cost
curves; and variable cost curves. Some are applicable to the short
run, others to the long run.
From the various combinations we have the following short-run cost curves:
 Short-run average fixed cost (SRAFC)
 Short-run average total cost (SRAC or SRATC)
 Short-run average variable cost (AVC or SRAVC)
 Short-run fixed cost (FC or SRFC)
 Short-run marginal cost (SRMC)
 Short-run total cost(SRTC)
 Short-run variable cost (VC or SRVC)
and the following long-run cost curves:
 Long-run average total cost (LRAC or LRATC)
 Long-run marginal cost (LRMC)
 Long-run total cost (LRTC)
Short-run total cost (SRTC) and long-run total cost
(LRTC) curves
The short-run totalcost(SRTC) and long-runtotal cost (LRTC) curves
are increasing in the quantity of output produced because producing more
output requires more labor usage in both the short and long runs, and
because in the long run producing more output involves using more of the
physical capital input; and using more of either input involves incurring
more input costs.

2. The total cost curve, if non-linear, can represent increasing and diminishing marginal returns.
With only one variable input (labor usage) in the short run, each possible
quantity of output requires a specific quantity of usage of labor, and the
short–run total costas a function of the output level is this unique quantity
of labor times the unit costof labor. But in the long run, with the quantities
of both labor and physical capital able to be chosen, the total costof
producing a particular output level is the result of an optimization problem:
The sum of expenditures on labor (the wage rate times the chosenlevel of
labor usage) and expenditures on capital (the unit cost of capital times the
chosenlevel of physical capital usage) is minimized with respectto labor
usage and capital usage, subjectto the production function equality relating
output to both input usages; then the (minimal) level of total cost is the total
costof producing the given quantity of output.
Relationship between short-run and long-run cost curves
 For each quantity of output there is one cost–minimizing level of capital
and a unique short–run averagecostcurve associated with producing the
given quantity.
 The following statements assumethat the firmis using the optimal level of
capital for the quantity produced. If not, then the SRACcurvewould lie
"wholly above" the LRAC and would not be tangent at any point.
 Each STC curvecan be tangent to the LRTC curveat only one point. The STC
curvecannot cross (intersect) the LRTC curve.

3.  The STC curvecan lie wholly “above” the LRTC curvewith no tangency
point.
 One STC curveis tangent to LRTC at the long–run cost–minimizing level of
production. At the point of tangency LRTC = STC. At all other levels of
production STC will exceed LRTC.
 Averagecost functions are the total cost function divided by the level of
output. Therefore, the SATCcurveis also tangent to the LRATC curveat the
cost-minimizing level of output. At the point of tangency LRATC = SATC. At
all other levels of production SATC> LRATC
 To the left of the point of tangency the firm is using too much capital and
fixed costs are too high. To the right of the point of tangency the firm is
using too little capital and diminishing returns to labor are causing costs to
increase.
 The slope of the total cost curves equals marginal cost. Therefore, when
STC is tangent to LTC, SMC = LRMC.
 At the long–run cost–minimizing level of output LRTC = STC; LRATC = SATC
and LRMC = SMC
 The long–run cost–minimizing level of output may be different fromthe
minimum SATC.
 With fixed unit costs of inputs, if the production function has constant
returns to scale, then at the minimal level of the SATC curvewe haveSATC
= LRATC = SMC = LRMC.
 With fixed unit costs of inputs, if the production function has increasing
returns to scale, the minimum of the SATCcurve is to the right of the point
of tangency between the LRAC and the SATCcurves.
 Where LRTC = STC, LRATC = SATCand LRMC = SMC.
 With fixed unit costs of inputs and decreasing returns the minimum of the
SATC curveis to the left of the point of tangency between LRAC and SATC,
whereLRTC = STC, LRATC = SATC and LRMC = SMC.
 With fixed unit input costs, a firmthat is experiencing increasing
(decreasing) returns to scaleand is producing at its minimum SACcan
always reduceaverage costin the long run by expanding (reducing) the use
of the fixed input.
 LRATC will always equalto or be less than SATC.

4.  If production process is exhibiting constantreturns to scale then minimum
SRAC equals minimum long run averagecost. The LRAC and SRACintersect
at their common minimum values. Thus under constant returns to scale
SRMC = LRMC = LRAC = SRAC.
 If the production process is experiencing decreasing or increasing,
minimum shortrun average costdoes not equal minimum long run average
cost. If increasing returns to scale exist long run minimum will occur at a
lower level of output than SRAC.
 This is becausethere areeconomies of scale that have not been exploited
so in the long run a firmcould always producea quantity at a price lower
than minimum shortrun averagecostsimply by using a larger plant.
 With decreasing returns, minimum SRAC occurs at a lower production level
than minimum LRAC because a firm could reduce average costs by simply
decreasing the sizeor its operations.
 The minimum of a SRACoccurs when the slope is zero.
 Thus the points of tangency between the U-shaped LRAC curveand the
minimum of the SRACcurvewould coincide only with that portion of the
LRAC curveexhibiting constanteconomies of scale.
 For increasing returns to scale the point of tangency between the LRACand
the SRACwould haveto occur at a level of output below level associated
with the minimum of the SRAC curve.
Short-run, long-run, very long-run
The short run, long run and very long run are different time periods in economics.
Quick definition
 Very short run – where all factors of production are fixed. (e.g on one
particular day, a firm cannot employ more workers or buy more products to
sell)
 Short run – where one factor of production (e.g. capital) is fixed. This is a
time period of fewer than four-six months.
 Long run – where all factors of production of a firm are variable (e.g. a
firm can build a bigger factory) A time period of greater than four-six
months/one year

5.  Very long run – Where all factors of production are variable, and
additional factors outside the control of the firm can change, e.g.
technology, government policy. A period of several years.
Short run
 In the short run one factor of production is fixed, e.g. capital. This means
that if a firm wants to increase output, it could employ more workers, but
not increase capital in the short run (it takes time to expand.)
 Therefore in the short run, we can get diminishing marginal returns, and
marginal costs may start to increase quickly.
 Also, in the short run, we can see prices and wages out of equilibrium, e.g.
a sudden rise in demand, may lead to higher prices, but firms don’t have
the capacity to respond and increase supply.
Long run
 The long run is a situation where all main factors of production are
variable. The firm has time to build a bigger factory and respond to
changes in demand. In the long run:
 We have time to build a bigger factory.
 Firms can enter or leave a market.
 Prices have time to adjust. For example, we may get a temporary surge
in prices, but in the long-run, supply will increase to meet it.
 The long run may be a period greater than six months/year
 Price elasticity of demand can vary – e.g. over time, people may
become more sensitive to price changes, in short run, people keep
buying a good they are used to.

6. Relationship between short-run costs and long-run costs
 SRAC = short run average costs
 LRAC = long run average costs
This shows how a firm’s long-run average costs are influenced by different short-
run average costs (SRAC) curves.
The SRAC is u-shaped because of diminishing returns in the short run.