[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

COST (DOLLARS PER UNIT)
A
Long-run total
cost curve TC 3
TC 2
TC 1
Slope = minimum
short-run average
cost
Q 1 Q 2
COST (DOLLARS PER UNIT)
Long-run
B
average
cost curve
AC 1 AC 2 AC 3
Minimum
short-run
average
cost curve
Figure 6.8
Q 1 Q 2
QUANTITY (Q )
SHORT-RUN AND LONG-RUN COST CURVES
Panel A shows a series of short-run total cost curves, TC 1 , TC 2 , and TC 3 , each representing
a different level of fixed capital input. In the long run, a cost-minimizing firm can choose
any of these, so the long-run total cost curve will be the lowest cost of producing any level
of output, as shown by the darkened lower boundary of the curves. Panel B shows a series
of short-run average cost curves, AC 1 , AC 2 , and AC 3 , each representing a different level of
fixed capital input. In the long run, a cost-minimizing firm can choose any of these, so the
long-run average cost curve will be the darker lower boundary of the curves.
decided how much output it plans to produce, it will choose the number of plants
that minimizes its average costs. Thus, if the firm plans to produce less than Q 1 ,
it builds only one plant; AC 1 is less than AC 2 for all outputs less than Q 1 . If the
firm plans to produce between Q 1 and Q 2 , it builds two plants, because in this
interval, AC 2 is less than either AC 1 or AC 3 . For outputs greater than Q 2 , the firm
builds three plants. The long-run average cost curve is the darker bumpy curve in
Figure 6.8B.
The bumps in the long-run average cost curve arise because we have assumed
the only alternatives in the long run that are available to the firm involve building one,
two, or three plants. We have ignored the many other options a firm has. If the firm
is operating one plant, it can expand by, say, adding a new assembly line rather than
building a whole new plant. Or it can add new machines to its current plant. These
types of adjustments would lead to a series of total cost curves between TC 1 and
TC 2 in Figure 6.8A. When we take into account all the options a firm typically has to
SHORT-RUN AND LONG-RUN COST CURVES ∂ 143