Short-run Average Total Cost Curve (SRATC or SRAC)
The average total cost curve is constructed to capture the relation between cost per unit of output and the level of output, ceteris paribus. A perfectly competitive and productively efficient firm organizes its factors of production in such a way that the average cost of production is at the lowest point. In the short run, when at least one factor of production is fixed, this occurs at the output level where it has enjoyed all possible average cost gains from increasing production. This is at the minimum point in the diagram on the right.
Short-run total cost is given by
- STC = PKK+PLL,
where PK is the unit price of using physical capital per unit time, PL is the unit price of labor per unit time (the wage rate), K is the quantity of physical capital used, and L is the quantity of labor used. From this we obtain short-run average cost, denoted either SATC or SAC, as STC / Q:
- SRATC or SRAC = PKK/Q + PLL/Q = PK / APK + PL / APL,
where APK = Q/K is the average product of capital and APL = Q/L is the average product of labor.
Short run average cost equals average fixed costs plus average variable costs. Average fixed cost continuously falls as production increases in the short run, because K is fixed in the short run. The shape of the average variable cost curve is directly determined by increasing and then diminishing marginal returns to the variable input (conventionally labor).
Read more about this topic: Cost Curve
Famous quotes containing the words average, total, cost and/or curve:
“In ‘70 he married again, and I having, voluntarily, assumed the legal guilt of breaking my marriage contract, do cheerfully accept the legal penalty—a life of celibacy—bringing no charge against him who was my husband, save that he was not much better than the average man.”
—Jane Grey Swisshelm (1815–1884)
“Of lower states, of acts of routine and sense, we can tell somewhat; but the masterpieces of God, the total growths and universal movements of the soul, he hideth; they are incalculable. I can know that truth is divine and helpful; but how it shall help me I can have no guess, for so to be is the sole inlet of so to know.”
—Ralph Waldo Emerson (1803–1882)
“In the early days of the world, the Almighty said to the first of our race “In the sweat of thy face shalt thou eat bread”; and since then, if we except the light and the air of heaven, no good thing has been, or can be enjoyed by us, without having first cost labour.”
—Abraham Lincoln (1809–1865)
“And out again I curve and flow
To join the brimming river,
For men may come and men may go,
But I go on forever.”
—Alfred Tennyson (1809–1892)