Answer to Question #321081 in Microeconomics for Govind

Question

Using the concept of economies and diseconomies of scale, explain the shape of a firm’s long run average

cost curve. How are the short run average cost curvewith the long run average curve?

Answer 1

Economies of scale indicate that as the quantity of output goes up, the cost per unit goes down. On the other hand diseconomies of scale shows that as the level of output and the scale rises, the average cost rises as well.

The curve is a long-run average cost since it allows all factors of production to change. Whereas the short-run average cost curve assumes the fixed cost and variable cost changes only. In the short run when a firm increases its level of output, the average cost of production can either increase or decrease. The curves can either be downward sloping or U-shaped.