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Explain the difference between Long Run Total Costs and Short Run Total costs

In the short run at least one of the factors of production (Land, Labor, Capital and Enterprise) is fixed. Due to this there are short run fixed costs relating from the fixed factors of production. In Economics it is normally capital and land that are seen as fixed in the short run as the sale and purchase of new land can take a considerable time and the development of new machinery and technology (new capital) normally lasts several years. Therefore it is normally labor that is seen as the variable factor of production. As you can see from the graph the SRTC curve cuts the y axis at a non zero value, this is because fixed costs have to be payed even if the firm shuts down ie produces nothing. SRTC curve rises with output as it requires more units of the variable factor of production which in this case is labor to produce more. Note that the SRTC curve will begin to rise more steeply due to the law of diminishing returns as each extra unit of labor is less productive than the last unit of labor in producing output. Where as in the Long run, all factors of production are variable therefore resulting in no fixed costs as all the costs relating to the factors of production can vary. You can see how then on the diagram that LRTC curve strikes the axis at 0 whenever there is no output. Similarly to the SRTC curve it too rises with output and eventually begins to get stepper and steeper as outut rises. However, this is due to dis economies of scale rather than decreasing marginal returns. Dis economies of scale is the rise in AC due to an increase in production in the long run.



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