Cost Curves

Describes equations and graphs of a firm's cost curves. Explains the difference between short run and long run costs.

[@OmarAhmed-cm3mv]

I was starting to get depressed till I watched this. Everything becomes clear when you start to talk about it. Thank you.

[@KatherineSilzCarson]

Thank you for watching Omar! I am glad that it was helpful to you.

[@marifkhan7054]

Hi. could you please explain why long run average cost curve tangent to the left of SRAC1 even though minimum cost is obtained where SRMC1=SRAC1 but the long run average cost is not tangent on this point why.?

[@KatherineSilzCarson]

I think that this is mostly due to the limits of my drawing ability. The tangency points should be as you describe them. Thank you for your question!

[@marifkhan7054]

@@KatherineSilzCarson but mam. many books even mentioned that case, but could not properly explain it.

[@oneen1957]

Hi! If the least profit that a firm can generate in the long run is zero, how about if it was in the short run? Is it possible for the firm (in short run) to generate negative profit because of fixed cost???

[@KatherineSilzCarson]

Hi Oneen! It is definitely possible for firms to have negative profits in the short-run due to fixed costs. If you look at most small businesses, usually it takes them a while after they start before the owners start being able to pay themselves (sometimes called "owner's draw" in business-speak). Because during that time, owner aren't covering their opportunity costs of owning the business, we would consider them to be running negative economic profits. Thank you for your question, and thank you for watching!

[@omarabukar8217]

Thanks for u helping

[@KatherineSilzCarson]

Thank you for watching!

[@Explorer982]

Hi, at 1.46 could you please briefly explain the algebra of the substitution?

[@Explorer982]

Is the cost equation c =w1x1 × w2x2?

[@KatherineSilzCarson]

Mark - the cost equation is Cost = w1x1 + w2x2, where x1 and x2 are the quantities of each input that the firm uses, and w1 and w2 are the per-unit prices of inputs x1 and x2, respectively. If I substitute the equations for x1 and x2 into the cost equation, I get Cost = w1(y/3)[(w2/w1)^0.5] + w2(y/3)[(w1/w2)^0.5]. Multiplying out the first term, I have w1*y*(w2^0.5) in the numerator and 3*(w1^0.5) in the denominator. Note that w1/(w1^0.5) leaves me with w1^0.5 in the numerator. Which means I the first term is [y*(w1^0.5)*(w2^0.5)]/3. In the second term, I have w2 in the numerator and w2^0.5 in the denominator, so these terms cancel similarly to the w1's in the first term. Thus, I get Cost = [y*(w1^0.5)*(w2^0.5)]/3 + [y*(w1^0.5)*(w2^0.5)]/3. Since these two terms are the same, I can add them together, so I get Cost = [2y(w1^0.5)(w2^0.5)]/3. Hope this helps!

[@adeelfarooqi4911]

How can the cost function be long run, while the input costs are fixed?

[@KatherineSilzCarson]

Great question, adeel. The key to distinguishing a long run cost function from a short-run cost function is to ask yourself, what are the firm's costs if it produces zero output? If the answer is zero, the function is a long-run cost function. If positive, then the function is a short-run cost function. So, long-run cost functions can still have a constant component. The constant represents what are known as quasi-fixed costs - costs that the firm only incurs if it produces a positive quantity of output. Hope this helps!

[@adeelfarooqi4911]

Thanks all clear