Chapter 7, Problem 1DQ

To determine

Long run and short run average cost of production.

Explanation of Solution

The average cost of production is calculated by dividing the total cost of production with the quantity of labor used. When the firm operates in the short run and experiences the increase in the output, it means that the cost of labor increases due to the increased payment for extra working hours. In the long run, the firm could install new machineries to increase the output.

In this case, the long run average cost will include the cost of new machineries purchased by the firm whereas the short run does not include this cost. It will look like as the average cost of short run production is lower in the economy. But the case is not like that. Even though the long run average cost includes the cost of new machines purchased, it will be lower than the short run because of the fact that continuously operating few machines and labors for more hours causes physical damages to labor as well as machineries which decreases the marginal product of labor as well as capital. When the short run average cost is less than the long run average cost, the firm will never go for the long run production process.

Economics Concept Introduction

Cost of Production: The cost of production includes all the different kinds of costs incurred by the firm during the process of production. It includes both the fixed as well as variable costs.