Overview
This lecture explains the relationship between short-run and long-run average total cost (ATC), using a food truck example to illustrate cost optimization as scale changes.
Short-Run Average Total Cost (SRATC)
- Short-run costs include both fixed costs (e.g., number of trucks) and variable costs (e.g., staff, supplies).
- The short run is defined as the period where at least one input (like trucks) is fixed.
- SRATC is calculated as the sum of average fixed cost and average variable cost.
- With 2 trucks optimized for 200 tacos/day, SRATC per taco is $0.50.
- Producing fewer or more than the optimal quantity with the same fixed input increases SRATC (e.g., 100 tacos/day costs $0.70 each, 300 tacos/day costs $0.80 each).
Long-Run Average Total Cost (LRATC)
- In the long run, all inputs are variable and firms can adjust fixed costs (number of trucks).
- LRATC is minimized by choosing the optimal fixed input for any production level.
- For 100 tacos/day, selling a truck and using one reduces the cost to $0.60 per taco.
- For 300 tacos/day, adding a third truck allows optimal production for $0.50 per taco.
- The LRATC curve connects the lowest points of each SRATC curve for different production quantities.
- The LRATC is the "envelope" of all SRATC minimum points, reflecting optimal fixed input adjustment at each quantity.
Key Terms & Definitions
- Short-Run — Time period when at least one input (e.g., trucks) is fixed.
- Long-Run — Time period when all inputs can be varied or adjusted.
- Average Total Cost (ATC) — Total cost divided by quantity produced; sum of average fixed and average variable costs.
- SRATC Curve — Shows average total cost at various output levels with a fixed input.
- LRATC Curve — Envelope curve connecting the minimum SRATC costs at each output when all inputs are variable.
Action Items / Next Steps
- Review how SRATC and LRATC curves are constructed and relate to each other.
- Practice drawing SRATC and LRATC curves with different fixed input scenarios.
- Prepare examples of optimizing fixed costs for given output levels.