Suppose a firm produces cars and the minimum efficient scale is 2,000,000 cars. The inputs are labor and capital (machines), and the cost minimizing input combination to produce 2,000,000 cars in the long run uses 2,000 ma- chines. If the firm produces 1,000,000 cars then the average cost is higher. The cost minimizing input combination to produce 1,000,000 cars uses 1,000 machines. Draw a diagram illustrating the long run average cost curve and two short run average cost curves (one with capital fixed at 1,000 machines and another with capital fixed at 2,000 machines). The diagram should have average cost on the vertical axis and output (number of cars produced) on the horizontal axis.

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Short-Run Costs and Long-Run Costs

Cost of short-run and the long-run is an economic term that describes the cost involved in the production of goods in a firm in the short as well as long period.