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:
“Here is a golden Rule.... Write legibly. The average temper of the human race would be perceptibly sweetened, if everybody obeyed this Rule!”
—Lewis Carroll [Charles Lutwidge Dodgson] (1832–1898)
“Someone once asked me why women don’t gamble as much as men do, and I gave the common-sensical reply that we don’t have as much money. That was a true but incomplete answer. In fact, women’s total instinct for gambling is satisfied by marriage.”
—Gloria Steinem (b. 1934)
“Keeping accounts, Sir, is of no use when a man is spending his own money, and has nobody to whom he is to account. You won’t eat less beef today, because you have written down what it cost yesterday.”
—Samuel Johnson (1709–1784)
“The years-heired feature that can
In curve and voice and eye
Despise the human span
Of durance—that is I;
The eternal thing in man,
That heeds no call to die.”
—Thomas Hardy (1840–1928)