Cost curves can be depicted for both the short run and the long run. The short run is the operating period during which at least one input (typically capital) is fixed in supply. During this period, fixed costs can be incurred even if the firm produces no output. In the long run, there are no fixed costs -- all inputs and costs are variable. Short-run cost curves are sometimes called operating curves because they are used in making near-term production and pricing decisions. Fixed costs are irrelevant for these decisions. Long-run cost curves are referred to as planning curves, since they play a key role in longer-run planning decisions related to plant size and equipment acquisitions.
The minimum efficient scale is defined as that plant size at which long-run average cost is first minimized. The minimum efficient scale affects both the optimal plant size and the level of potential competition. Industries where the average cost declines over a broad range of output are characterized as having economies of scale.
A learning curve displays the relation between average cost and cumulative volume of production. For some firms, the long-run average cost for producing a given level of output declines as the firm gains experience from producing the output (that...
Economies of scope help explain why firms often produce multiple products.
The profit-maximizing output level occurs at the point where marginal revenue equals marginal cost. At this point, the marginal benefits of increasing output are offset exactly by the marginal costs.
The marginal revenue product of input I (MRPi) equals the marginal product of the input times marginal revenue. Profit-maximizing firms use an input up to the point of where the MRP of the input equals the input price. At this point, the marginal benefit of employing more of the input is offset exactly by its marginal cost.
Managers often use estimates of cost curves in decision making. A common statistical tool for estimating these curves is regression analysis. One common problem in statistical estimation is the difficulty of obtaining good information on the opportunity costs of resources. Another problem with estimating cost curves involves allocating fixed costs in a multiproduct plant. Cost accounts track the costs and estimate product costs.
